Report no. 100 – 7 February 2023

r5-year Productivity Inquiry:
Advancing Prosperity
Inquiry report – volume 1i5-year Productivity Inquiry: Advancing Prosperity Inquiry report

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Transmittal letter

Transmittal letter
Canberra Office
4 National Circuit
Barton ACT 2600
GPO Box 1428
Canberra City ACT 2601
Telephone 02 6240 3200
Melbourne OfficeTelephone 03 9653 2100
www.pc.gov.au

7 February 2023
The Hon Dr Jim Chalmers MP
Treasurer
Parliament HouseCANBERRA ACT 2600

Dear Treasurer
In accordance with section 11 of the Productivity Commission Act 1998, we have pleasure in submitting
to you Advancing Prosperity, the Commission’s final report for the 5-year Productivity Inquiry.
Yours sincerely,

Michael Brennan
Chair

Alex Robson
Deputy Chair

Lisa Gropp
Commissioner

Stephen King
Commissioneriii

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Terms of reference
I, Josh Frydenberg, Treasurer, pursuant to parts 2 and 3 of the Productivity Commission Act 1998, hereby
request that the Productivity Commission undertake an inquiry into the Australia’s productivity performanceand provide recommendations on productivity-enhancing reform. This inquiry is the second of a regularseries, undertaken at five-yearly intervals, to provide an overarching analysis of where Australia stands interms of its productivity performance. The first report, Shifting the Dial was completed in 2017.

Background
Australia’s economy has performed strongly in recent decades enjoying robust growth in incomes and living
standards following 28 years of consecutive economic growth interrupted by the COVID-19 pandemic.
Australia’s economic recovery from the pandemic has been world leading however to ensure Australians
continue to enjoy higher living standards, we need to continue to focus on the task of lifting productivity.
Productivity growth is vital for Australia’s future, particularly as the Australian and global economies emerge
and begin to recover from the economic impacts of COVID-19. The 2021 Intergenerational Report makes it
clear that future growth in income and living standards will be driven from productivity growth as theparticipation effects of young migration are offset by an ageing population. Global and domestic productivity
growth in recent decades however has slowed. Changes brought about by the COVID-19 pandemic and theglobal and domestic policy responses will also provide a unique historical context for this Review.
Given the scale and nature of the economic shock caused by the COVID-19 pandemic, it is expected to havean enduring impact on Australia’s productivity challenge. The acceleration in the uptake of technology bybusiness and individuals has stimulated growth in remote work, online commerce, businesses’ digitalpresence and innovative delivery of public services like health and education. The pandemic has affectedbusiness models in some key sectors and underscored the need for labour mobility across the economy.
In this environment, Australia needs policy settings that foster a flexible and dynamic economy, that is able
to adapt in the face of economic challenges and opportunities. Policy settings should encourage theeconomy to adapt to the growing importance of digital technologies, including through developing a skilled
labour force. They must also be forward looking and support an environment that promotes economic
dynamism, entrepreneurship and appropriate risk-taking, and innovation and technological adoption.
Against this background, the Review can play a critical role in making high-value and implementable
recommendations to support Australia’s productivity growth. Lifting Australia’s productivity growth will involvea combination of economy-wide and structural reforms, in addition to targeted policies in particular sectors topush Australian industries closer to the global frontier.

Scope of the inquiry
The Commission is to review Australia’s productivity performance and recommend an actionable roadmap toassist governments to make productivity-enhancing reforms. Each recommendation should qualitatively andiv

Terms of reference

quantitatively estimate the benefit of making the reform and identify an owner for the action and a timeframein which it might occur.
Without limiting related matters on which the Commission may report, its report to the Government should:
1. Analyse Australia’s productivity performance in both the market and non-market sectors, including anassessment of the settings for productive investment in human and physical capital and how they can be
improved to lift productivity.
2. Identify forces shaping Australia’s productivity challenge as a result of the COVID-19 pandemic andpolicy response.
3. Consider the opportunities created for improvements in productivity as a result of Australia’s COVID-19
experience, especially through changes in Australia’s labour markets, delivery of services (including
retail, health and education) and digital adoption.
4. Identify priority sectors for reform (including but not limited to data and digital innovation and workforce
skills) and benchmark Australian priority sectors against international comparators to quantify therequired improvement.
5. Examine the factors that may have affected productivity growth, including domestic and global factors
and an assessment of the impact of major policy changes, if relevant.
6. Prioritise and quantify the benefit of potential policy changes to improve Australian economic
performance and the wellbeing of Australians by supporting greater productivity growth to set out aroadmap for reform.
7. Revisit key recommendations and themes from the previous five yearly review in light of the above,
where relevant.
The Commission should have regard to other current or recent reviews commissioned by Australian
governments relating to Australia’s productivity performance and include comparisons of Australia’s
productivity performance with other comparable countries. The Commission should support analysis withmodelling where possible and qualitative analysis where data is not available, and this is appropriate.

Process
The Commission should consult widely and undertake appropriate public consultation processes, inviting
public submissions. The Commission should actively engage with Commonwealth, and state and territory
governments. The final report should be provided to the Government within 12 months of receipt of theseterms of reference.

The Hon Josh Frydenberg MP
Treasurer[Received 7 February 2022]v

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Acknowledgements
The Commission acknowledges and thanks the following Commissioners and staff who have worked on theInquiry:

Michael Brennan
Alex Robson
Lisa Gropp
Stephen King

Catherine de Fontenay
Julie Abramson
Martin Stokie
Paul Lindwall
Joanne Chong

Rosalyn Bell
Ralph Lattimore
Jared Dent
Sara Collard
Contributors through to the Inquiry final report
Anuraag Roy
Belinda Cheong
Cameron Eren
Christopher Bottomley
Colin Burns
Elina Gilbourd
Guy McInnes
Hudan Nuch
James Smith
Kathleen Hurley
Matthew Forbes
Matthew Jones
Paulene McCalmanPeter Bon
Rebecca Chin
Sebastian Porter
Shelby So
Toby Markham
Yael Jacobyvi

Contributors up to the Inquiry interim reports
Anand Bharadwaj
Andy McClure
Emily Gray
Gwendaline Jossec
Jonathan Vandenberg
Matthew Maltman
Natalie Baker
Owen Freestone
Zoe Chalmers

Contents

Contents
Transmittal letteriii

Terms of referenceiv

Forewordix

1.

An agenda to lift Australia’s productivity

1

1.1

Australia faces a productivity predicament1

1.2

There are headwinds to faster productivity growth3

1.3

A policy agenda for a more productive Australia

11

1.4

The shared benefits of a productivity agenda

41

2.

3.

A

Roadmap

45

2.1

The prioritisation framework

45

2.2

The prioritised reforms

47

2.3

Implementation plans

51

Recommendations linked to reform directives

71

Building an adaptable workforce: education

71

Building an adaptable workforce: migration

79

Building an adaptable workforce: occupational licensing

81

Building an adaptable workforce: workplace relations and platform work

84

Harnessing data, digital technology and diffusion

87

Creating a more dynamic economy

92

Lifting productivity in the non-market sector

97

Securing net zero and adapting to a changing climate at least cost

100

Inquiry conduct and participants

103

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

viiForeword

Foreword
There has been a vast improvement in average human well-being over the last 200 years: measured inlonger lives, diseases cured, improved mobility, safer jobs, instant communications and countless
improvements to comfort, leisure and convenience.
Will our living standards continue to improve at the same rate they did in the past?
We measure and aggregate those improvements into a single number — the rise in GDP per hour worked
across the economy. It is an imperfect measure but has enormous value if we interpret it carefully. One
important message is that the average rate of productivity growth in Australia has slowed in the last
20 years, as it has in much of the developed world.
But it is also important to move beyond thinking about productivity growth in terms of a single number — an
economy-wide percentage growth rate. In fact, there has always been great variability in productivity
performance across the economy. Some sectors have seen huge technological transformation andinnovation, with bursts of rapid productivity growth — with products becoming radically cheaper and better,and a steady flow of new offerings. Other sectors, not so much.
Globally, agriculture, manufacturing, mining, energy, transport and communications have seen this sort oftransformation. Other sectors, including many service industries, have not.
It turns out that this variation really matters.
When productivity growth in different sectors consistently diverges, then (perhaps counter-intuitively) the
sectors with high productivity growth tend to shrink as a share of the economy while low productivity sectors
grow. It is as though we collectively spend more effort (resources) on what is hard but necessary, and less onthat which is getting easier. But if maintained, this pattern can lead to an ever-growing share of low productivity
sectors — an ever-growing drag on overall future productivity growth. This is known as ‘cost disease’.
This has a big implication: productivity policy has to focus on the areas that have proven hardest; not thoseareas where past progress has been most readily achieved. As US economist Ben Jones put it:
GDP and future progress depend less and less on the sectors we have found relatively easy toadvance … and increasingly on the sectors that continue to be hard, which make up a growing
share of the economy.1
In many ways, that is the key theme of this report — how we might adjust productivity policy to focus moreon the hard areas.
Productivity improvement in services is hard. Services tend to be labour intensive, many are delivered inperson, often bespoke and hence not amenable to mass production. They can be hard to automate. But they
have grown to make up 80% of the economy and 90% of the workforce. Future productivity growth in Australia
relies crucially on getting better productivity across the services sector. In Australia, services sector productivity
has lagged that of the goods sector. Government services, in particular, have seen very low productivity
growth. Our performance relative to other economies is typically weaker in services than in goods.

1 Jones, B.G. 2022, ‘Where innovation happens, and where it does not’ in Andrews et al. (eds.), The Role of Innovationand Entrepreneurship in Economic Growth, NBER.
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5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Having highly skilled and adaptive workers will be critical to address this challenge. A skilled and flexible
workforce is a broad enabler — it militates in favour of balanced growth across all sectors of the economy,
including in the hard areas. If we get policy right — in education, skilled migration and labour market
regulation — this could be Australia’s most significant and enduring source of comparative advantage.
Education is a critical area of focus. First, because it represents perhaps the greatest and most enduring
general-purpose technology known to humankind — the ability to transfer knowledge in a concentrated form;
and to build in people a general capability for future learning. As human strength and speed, and routine
tasks in general, have been replaced by technology, the focus of jobs shifts towards higher order skills. A
highly skilled workforce is necessary to use technology, and to add more value in the distinctly human areasthat technology cannot replace.
Second, education is one of those government services that has itself seen very low productivity growth. We
have achieved huge gains in economy-wide productivity by adding additional years of education. There issome scope for this to continue but, overwhelmingly, future gains will have to come from higher quality
education from the resources (including years of student time) we put into it. That means productivity.
We also need to re-think the emphasis of innovation policy. Existing policy instruments reflect traditional
channels of innovation — tax incentives for research and development, patent protections for new
inventions, commercialisation of new ideas. These remain important but are only a small part of theinnovation story. They (again) provide a continued path for those sectors where innovation and advancehave been most readily achieved in the past. The bigger story is where innovation has not happened, or has
happened differently.
Some 98% of Australian businesses do not produce new-to-the-world innovations. They are adopters,
adapters, incremental improvers. For productivity, they are the main game. Supporting them to take up newtechnology or adopt a business innovation could have profound and broad productivity benefits. But
facilitating the flow of ideas is hard. There are fewer existing policy levers that have broad application. The
role for government has to be thought through. The combination of many small things, on multiple fronts, islikely to be the optimal policy mix.
The adoption of digital technology, artificial intelligence and data use by business is a key example. Theseare vital enablers of productivity — perhaps even more so in services industries where they can augmenthuman input and, in some cases, generate scale. Government actions in improving data availability, promoting
regtech, and facilitating secure use of technology all create an environment for increased uptake by business.
Stepping back, the most effective diffuser of ideas is a dynamic economy, in which knowledge spreads
through competition, labour mobility, and trade and investment links. Some indicators suggest the Australianeconomy has become less dynamic in the last two decades. But the solutions are complex. Broad policy
enablers like tax and land use regulation play an important role in fostering business entry, competition andinvestment. In many areas (such as insolvency law or access to finance) progress is already being made. In
other areas it is important for policy makers to tread carefully to avoid unintended harms.
The non-market economy — mainly government services — is different in many respects. Prices,competition and entry and exit are less salient (if at all).
Innovation can be more limited in the non-market economy. Moreover, it has proven hard to spread thoseinnovations that do arise — sometimes because of regulations, sometimes funding models, and often
culture. In many cases, the innovation eco-system is lacking, and needs to be developed from the groundup. The creation of the Australian Education Research Organisation is a standout example of new‘infrastructure’ to support innovation and the use of evidence across the school system.

xForeword

If we are to focus attention on the hard areas, then there are none harder than the non-market economy.
Productivity growth in this sector could look different — perhaps it will manifest more in better quality
services than in cheaper ones. But in the absence of productivity growth, the ‘cost disease’ will worsen andspread. Government services will expand as a share of the economy, requiring ever faster productivity
growth elsewhere to ‘fund’ it.
The productivity challenge comes into stark relief in respect of climate policy. Decarbonising the economy
in the next three decades will be a huge transformation. The difference between doing it efficiently and doing
it poorly will be a major determinant of the living standards of all Australians. It is a productivity challenge —how to harness investment, innovation and shape incentives to reduce cost (albeit a cost we do not currently
count in GDP or business profits).
Reflecting these priorities, this report, complemented by its other volumes, is organised around five key
reform pillars:
1.
2.
3.

4.
5.

Building an adaptable workforce to supply the skilled workers for Australia’s future economy, througheducation reform, skilled migration and modern, fit-for-purpose labour market regulations.
Harnessing data, digital technology and diffusion to capture the dividend of new ideas, focusedparticularly on the adoption of ideas by the 98% of businesses who are not cutting-edge innovators.
Creating a more dynamic economy through fostering competition, efficiency and contestability inmarkets, through a range of levers — from competition policy and sector specific regulation to broad
enablers of business entry and investment.
Lifting productivity in the non-market sector to deliver high quality services at the lowest cost, bychanging incentives and culture.
Securing net-zero at least cost to limit the productivity impact caused by climate change, including by
fostering efficient adaptation to a changing climate.

Across these areas, there are 29 reform directives and 71 specific recommendations. Some are significant
policy changes with a potentially large individual impact. Others are a collection of smaller changes thatcollectively contribute to the goal of supporting productivity growth, particularly in hard-to-reach areas. Some
recommendations deal with a single decision, while others set out a direction for ongoing change, requiring
multiple steps.
This work builds on the Shifting the Dial report from 2017. That report refocused the reform conversation,highlighting the importance of cities, data policy, the working of the Federation and health policy. The themes
from Shifting the Dial, and the recommendations from that report are, if anything, increasingly relevant
following COVID-19 disruptions, and Australia’s data and digital progression.
As the second 5-yearly review into productivity, this report is a product of its policy and macro-economic
context. These include the lasting impacts of the COVID pandemic, a very different macro-economy to five
years ago, new fiscal pressures and a clearer policy commitment to decarbonising the economy.
One additional piece of context is the changing global order. A combination of war, inflation, strategic
tension, new concerns about supply chain resilience and an escalation of production subsidies and local
content rules by large economies like the United States create a different — and fast-changing — backdrop
for Australian policy. It is a challenge for productivity, which was aided by increased global trade andinvestment flows in the decades following the Second World War.
Australia can navigate these challenges, but should do so with a clear-eyed view of our distinct economic
structure and comparative advantages. Openness could look different, but it will be just as important.

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5-year Productivity Inquiry: Advancing Prosperity Inquiry report

A final point concerns uncertainty. We can never predict future rates of productivity growth nor its precise
sources: we cannot know what technological changes or innovations will transform which industries. Policy is
not about accurate prediction, so much as positioning. There are big technological opportunities out there
now — which can make a greater contribution in many parts of our economy. More discoveries will come,and we need to be fast and efficient adopters (and adapters) of them.
No policy exists that can mechanically lift productivity by a specified amount. We cannot dictate future
growth. But we can stack the odds in our favour.

A user’s guide to the productivity inquiry report
A cohesive suite of policy reforms to reinvigorate Australia’s productivity growth is presented.
The report is split into two parts: an overview document (volume 1) that presents our policy agenda, andinquiry content volumes (volumes 2–9) that explain in greater detail the reforms that make up the policy
agenda. These inquiry content volumes include background research and analysis, and a modelling
appendix, which outlines the results from an economy-wide model that was used to contextualise andbetter understand the distributional consequences of parts of the policy agenda.

Overview volume
Volume 1, Advancing Prosperity contains:
1.

2.

3.

A narrative overview that provides the economic context for this inquiry, outlines the barriers tofuture productivity growth, sets out a policy agenda to overcome these barriers, and paints a picture
about what the future could look like following reform implementation.
A roadmap that indicates to government which reform directives should be most highly prioritised.
The roadmap also contains one-page summaries of the details necessary for implementation of thehighest priority reform directives.
The set of recommendations from across the report, aggregated into reform directives that areorganised by broad policy theme. There are 29 reform directives made up of 71 separate
recommendations.

Inquiry content volumes
Volume 2, Keys to growth — discusses productivity as the key to Australia’s ongoing growth andprosperity, highlighting particular headwinds and challenges facing Australia’s productivity growth.
Volume 3, A competitive, dynamic and sustainable future — recognises that much of the
productivity improvement will be determined by decisions of businesses and so the institutional,
regulatory and tax environments in which businesses operate need to be conducive to
productivity-enhancing changes. Governments can influence this environment through changes to policy
settings for competition, trade and investment activity.
Volume 4, Australia’s data and digital dividend — examines opportunities for Australia to get
more value out of its data holdings by enhancing its secure use in developing innovative new products
and services, and improving the productivity of service delivery. Enabling Australia’s communities —xii

Foreword

A user’s guide to the productivity inquiry report
particularly in regional and remote areas — to benefit from digital tools and approaches, and supporting
businesses to be cyber safe, will be key to ongoing digital progression.
Volume 5, Innovation for the 98% — details the underappreciated importance of the diffusion of
innovative approaches and ideas throughout the economy. Options to encourage more diffusion of
innovations are canvassed, including greater use of collaboration and networks to catalyse diffusionand foster spillovers in the private sector, and new funding and procurement models for diffusion in
publicly funded and delivered services.
Volume 6, Managing the climate transition — provides a path for Australia to respond to its
climate change challenges at least cost for the economy and productivity. Reform of the safeguardmechanism for Australia’s largest greenhouse gas emitters is discussed as a way of helping Australia totransition towards a less costly and potentially more equitable response to climate change. Options foran efficient climate adaptation strategy are also outlined, focussed on information provision, and policy
settings that support adaptation decisions and development pathways.
Volume 7, A more productive labour market — examines the settings in Australia’s labour
markets that will be necessary to support renewed productivity growth. We detail reform options in skilledmigration, occupational licensing and workplace relations, including in relation to platform-based work.
Volume 8, From learning to growth — recognises the importance that quality education andtraining systems have for the skills and adaptability of our workforce. Innovation and its diffusion inschools is considered, in the context of making best practice in teaching, use of technology and school
operation widespread. Improving the quality of tertiary education (both universities and vocational
education and training) and options to support increased completion rates are considered.
Volume 9, Whole-of-economy modelling — describes the results of an economy-wide model
used in the inquiry to contextualise how the benefits of a stylised representation of certain reforms would
accrue and better understand some of the distributional impacts of these reforms. In particular, results
were estimated for aggregate measures such as incomes, prices, wages and GDP; the differential
impacts across various groups (delineated by age, gender and education); and measures of consumer
wellbeing and income inequality.
Where the results from the model were helpful in contextualisation, they have been discussed in therelevant supporting volume with an appendix to the volume summarising the key results.

xiiiAn agenda to lift Australia’s productivity

1.

1.1

An agenda to lift Australia’s
productivity

Australia faces a productivity predicament

Productivity growth is the key to long-term prosperity.
It is the process by which people get more from less: more and better products to meet human needs
produced with fewer hours of work and fewer resources. In many cases this growth occurs with lighter
environmental impact.
Historically, productivity growth has given Australians higher living standards and more leisure time —compared with Federation, the average Australian employee now works 14 fewer hours per week, while real
wages have increased more than six-fold.
But Australia, along with most other advanced economies, is facing a productivity predicament: a seemingly
entrenched slowdown in the rate of productivity growth.2
Over the decade to 2020, average annual labour productivity growth in Australia was the slowest in 60 years,
falling to just 1.1% compared with 1.8% over the 60 years to 2019-20 (figure 1.1).
This seemingly small difference — just 0.7 percentage points — has an outsized effect on the long-term
future prosperity of Australians. It means that the economic pie, and accordingly the welfare of Australians,
will be smaller than it might otherwise be. For example, the time it takes for economic output per person to
double increases by 25 years — approximately the length of a generation — from about 39 to 64 years. So
Australians would have to work relatively more hours to afford fewer goods and services than would
otherwise be the case; it means the rate at which higher quality goods and services and wholly new products
are introduced will be slower, and their prices higher than otherwise.
The Australian Government has officially acknowledged this productivity slowdown, reducing the productivity
assumption underlying its annual economic forecasts from 1.5% to 1.2%. This seemingly trivial downgrade
implies that, on average, the income of Australians in 40 years are projected to be almost 20% lower thanthey would otherwise be. And compared with the average over the past 60 years (1.8%), 1.2% productivity
growth implies that the increase in projected future incomes will be close to 40% lower and the working week
almost 5% longer (see volume 2).3 And the cumulative sum of year after year of slower productivity growth— the consumption and leisure opportunities lost forever — is significantly larger.

2 Average productivity growth among OECD economies since 2005 was roughly one percentage point per annum below

the historical average (see figure 2.3 in volume 2).
3 To make this concrete, a downgrade in productivity growth from 1.5% to 1.2% per annum would, over 40 years, reducethe income per capita increase by about $11,000 (by 20%). Over the same 40 year timeframe, a downgrade of
productivity growth from 1.8% to 1.2% would reduce the income per capita increase by $23,000 (by 40%).
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5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Simply put, entrenched, slow productivity growth leads to a much smaller productivity dividend in the longrun (box 1.1). Not only does it take longer to achieve a given level of prosperity, but the cost — in terms of
consumption forgone — of swapping out of work and into leisure is also much higher. The often touted‘4-day week’ is that much harder to achieve.
For society more broadly, there would be comparatively fewer resources available to face emerging
challenges, be they decarbonisation or changes in the global order. In other words, those same policy
settings that enable productivity growth also help to build a more agile and resilient economy — one better
able to resist and adapt to the vagaries of an uncertain world while maintaining the prosperity of Australians.
An effective policy response requires, on the one hand, an understanding by governments of the challenges togrowth, and a broad package of initiatives, often coordinated between different levels of government, andcovering almost all of their portfolios — there is no single ‘productivity lever’ that government can pull toguarantee growth. And on the other, an understanding that at any point in time, there are emergent
opportunities including from new technology. Growth comes from seizing those opportunities as they emerge.
Figure 1.1 – Labour productivity growth is at its slowest in 60 yearsa
Average labour productivity by 10 and 60 year periods

Labour productivity growth (%)

3.0
2.5

2.4

2.4

2.2
1.8

2.0
1.4

1.5

1.2

1.1

1.0
0.5
0.0
1960-70

1970-80

1980-90

Labour productivity growth by decade

1990-00

2000-10

2010-2060 year averagea. Labour productivity calculated as GDP per hour worked. GDP data sourced from the ABS between 1959-60 and 2021-22.
Hours worked data from Penn World Tables for between 1959-60 and 1973-74 and from the ABS between 1974-75 and 2021-22.

Box 1.1 – The productivity dividend: more consumption and less work
Productivity describes the quantity of products that can be generated (output) from the resources (inputs)
used in the production process. Productivity growth occurs when there is a reduction in the amount of
inputs required to produce a given level of output. This tends to lower the prices of outputs where
productivity growth is strongest. However, often productivity shows up as an improvement in the quality
or range of goods and services for given inputs — like better health treatments.
Hence, the growth in living standards experienced over the last 200 years can be seen as manifesting inthree main ways: cheaper goods and services; higher quality goods and services; and, entirely new
goods and services. In each of these three ways, productivity growth has increased the typical worker’s

2

An agenda to lift Australia’s productivity

Box 1.1 – The productivity dividend: more consumption and less work
purchasing power — a smaller number of hours of work is required to achieve any particular level ofliving standards.
The decreased hours of work and increased income that result from productivity growth can be thoughtof as a ‘productivity dividend’. One way to illustrate these benefits of productivity growth is to think about
the trade-off that it implies for the average worker between hours spent working on the one hand, andconsumption possibilities, on the other. Productivity growth leads to higher real wages and lower real
prices, which means that the average worker can choose to:• work the same number of hours and consume more (the whole dividend is used to increase consumption)• work less and consume the same amount (the whole dividend is used to reduce work)• some combination of the above including working less and consuming more (the dividend is divided
between less work and more consumption).
In practice, Australians have collectively, implicitly, chosen the third option, with most of the gains being
in the form of greater consumption with some reduction in aggregate working hours (volume 2).

1.2

There are headwinds to faster productivity growth

Headwinds tofaster productivity
growthThe services sector — where
productivity gains are harder tofind — is large and growing
A changing climate andheightened global tensions shape
Australia’s productivity predicament

The slowing rate of overall productivity growth is an important context for this report.
But there is another element to the story. The reality of productivity is never reflected in a single,
economy-wide growth rate. At any one time, some sectors of the economy experience rapid innovation andtechnological advance — and hence rapid productivity growth — while others do not.
The erratic path of productivity growth has been propelled by waves of technological and other innovation —often concentrated on specific sectors. Occasionally, general purpose technologies emerge with productivity
implications across the whole economy.
When productivity growth across different sectors diverges consistently over a long period, then the sectors
achieving profound progress tend to get smaller as their output costs come down. So the low productivity
sectors tend to grow as a share of the economy — known as ‘cost disease’ — a tendency that risks creating
an ever-growing drag on overall productivity growth.
A key message of this report, and one of the key determinants of future growth in the Australian economy,
will be how we address the need for productivity growth with the increasing dominance of services — by far
the largest part of the economy, but where productivity growth has historically proven harder to generate.

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5-year Productivity Inquiry: Advancing Prosperity Inquiry report

The services sector is large and growing
The services
sector is large
and growing

Non-market services could increasingly weigh on growth

Productivity gains may be hard won, even in market services

A services economy requires a highly skilled workforce

On average over the past 35 years, growth in labour productivity has been higher in the goods sector than inmost parts of the services sector. But over this period, the goods sector has been steadily shrinking, while
the services sector has been growing (figure 1.2).
Australia’s services sector now employs almost 9 out of 10 people in the labour force and accounts for about 80%
of economic output. Both figures have grown significantly over the past 70 years — from about 50% in 1950.
The expansion in services is neither a peculiar quirk of Australian economic development, nor an accident. It
is the result of, amongst other things, cost disease and (perhaps counter-intuitively) growing prosperity, as
well as an aging population — traits common to all prosperous economies (box 1.2).
But while an expanding and slow productivity growth services sector increases the headwinds to future
productivity growth, this shift is not something the government should attempt to ‘undo’ — such a move
would conflict with revealed community preferences and hence be costly and counterproductive.
Rather governments should seek to understand what might be hindering productivity growth in the services
sector and, where there is strong evidence for cost-effective intervention, act.
Figure 1.2 – Labour productivity growth in Australia by subsectora,bIndex (1995 = 100) between 1994-95 and 2020-21
220

200

Goods

180

Distribution services

160
140

Personal services
Business services

120

Industrial services

100
80
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

a. Industries at the Australian and New Zealand Standard Industrial Classification (ANZSIC) 1 digit level were
aggregated into sectors by weighting the growth in labour productivity by the hours share of that industry (in the previousyear). b. See volume 2, chapter 2, footnote 17 for definition of services aggregation.

4

An agenda to lift Australia’s productivity

Two key characteristics of Australia’s structural shift to services and that present downside risks to aggregate
productivity growth are:• the ‘non-market’ (defined below) services sector — because it is expanding disproportionately quickly in
relation to its rate of productivity growth. It already accounts for over 25% of Australia’s economic activity
and employment but where measured productivity growth is particularly slow — effectively zero since theturn of the century• the generally poor relative performance of Australia’s services — unlike in the goods sector, Australia’s
performance in the market service sector is below the average compared with our global peers (see volume 2).

Box 1.2 – Why have services become so dominant?
The expansion in size of the relatively slow productivity growth services sector is the global historical norm.
There are five main explanations for the increased share of the services sector in output and employment:
1. Baumol’s ‘cost disease’ — If certain sectors have comparatively slow labour productivity growthand consumers are somewhat unresponsive (inelastic) to relative price increases, then the share ofthis sector in both output and the labour force will tend to increase. This occurs because wages in allindustries, including the slow productivity growth sector, tend to grow at a similar pace to prevent an
exodus of workers from one sector to another. To fund higher wages, businesses raise their prices
and, because consumers are not very responsive to these higher prices, the overall share of the low
productivity sector increases in both output and employment.
2. Income effects — As incomes grow, consumers tend to spend a larger share of their income onservices, causing both the output and employment share of services to rise. Consumption ofholidays, house-cleaning, afterschool care, gyms and home delivered food has grown faster than thatof TVs, clothing and sports equipment.
3. Services as an input and inter-industry outsourcing — Services provided by other businesses areaccounting for an increasing share of business costs, even within the goods industry itself. In
manufacturing over the past 26 years, expenditure on services provided by businesses in otherindustries went from 15% of non-capital costs to 21%.a Reasons for this include: (i) slower productivity
growth in the services sector combined with production methods that are unable to substitute awayfrom services, and (ii) outsourcing of functions that were previously done inhouse.
4. Industrialisation in Asia — Rapid industrialisation in Asia with a focus on manufacturing exports
has caused significant outsourcing of manufacturing roles from the advanced economies todeveloping Asian economies.
5. Demographics — Increasing life expectancy combined with falling fertility rates in advanced
economies has meant that their populations have been ageing at a pace that is still a few decades
away from its peak. This has increased the demand for several non-market services including healthcare and aged care.
a. Calculated as the factor share of income divided by 1 minus the capital share (which gives the factor share of
non-capital income and is the same as the share of non-capital costs).

Non-market services could increasingly weigh on growthNon-market services are those that are typically provided free of charge, or at prices that are well below cost.
This is the case because usually the government is the key funder (and often the provider) and regulator ofthese services. Non-market services include schools, hospitals, childcare and defence services.
55-year Productivity Inquiry: Advancing Prosperity Inquiry report

Often by design, a degree of competition and cost reflective pricing are absent or less salient than in themarket sector. This can affect the channels and processes by which innovation and productivity growth canoccur and be transmitted.
The potential effect of low productivity growth in the non-market sector is stark. An extrapolation of pasttrends out to 2060-61 illustrates the scale of the challenge. If productivity growth in the non-market sector
continued at its historic level, then (under the simplest assumptions) in 40 years that sector would accountfor more than 40% of employment (figure 1.3).4 Under more nuanced assumptions, the non-market sector
would still increase materially as a share of the labour force.5
Figure 1.3 – Projected growth of the non-market share and aggregate labour productivitya
a. Non-market labour share (%)

b. Labour productivity growth (%)
1.25

48

43

Crude extrapolation

Constant ratio
market to non-market
consumption

38

Australian Government
Budget assumption
1.20
Constant elasticity of
substitution between
market and non-market
consumption

1.15

33
1.10

Constant elasticity
of substitution
between market
and non-market
consumption

28

23

Historical

18
2001

Constant ratio
market to non-market
consumption

1.05

1.00
2011

2021

2031

2041

2051

2061

2021

2031

2041

2051

2061

a. Productivity Commission modelling (see volume 2 appendix).

This result matters. It means that if productivity growth in an expanding non-market sector remains in linewith its measured historical average of zero, it would represent an increasingly large drag on overall
economy-wide productivity growth.
This implies that growth in the market sector must accelerate well above the rate of overall productivity
growth experienced in the Australian economy in the 2010s simply to maintain the overall economy-wide
average growth rate over that period (which was 1.1%). Indeed, even if market sector productivity grows at
the higher rates of growth observed in that sector during the 1990s, it is unlikely Australia would reach 1.2%
average labour productivity growth (figure 1.3). As such, improving productivity in the non-market sector is ahigh priority if Australia is to even maintain historical rates of economic growth.

4 2060-61 is the projection period for the most recent Australian Government Intergenerational Report.
5 Three scenarios were considered: (i) consumers and governments purchase a constant real ratio of non-market tomarket goods (that is, governments and consumers treat market and non-market goods as perfect complements;(ii) consumers and governments try to maintain a constant share of total expenditure on non-market goods irrespective of
price; (iii) consumers and governments will adjust their consumption of non-market services to price by a fixed proportion(constant elasticity of substitution). In all scenarios, market and non-market sector labour productivity is fixed (equal totheir 2-decade growth averages — these numbers are arbitrary for the purposes of this projection).
6

An agenda to lift Australia’s productivity

It is important to note that the non-market sector does suffer from measurement issues, and in particular, it islikely that quality improvements in, for example, health care and education, are under counted (see volume 2).
But even accounting for these quality improvements, it is likely that non-market productivity growth as a wholelags the market sector. Indeed, experimental ABS estimates for labour and multifactor productivity in schools,
hospitals and higher education have yielded similarly (to the National Accounts) low and slow estimates for therate of productivity growth. In addition, non-market services that are government funded and require additionaltax revenue to fund their expansion, place an increasing burden on the economy.

Productivity gains in services could be harder won
The goods sector will continue to be an important driver of productivity growth in the future, led by Australia’s
mining and agricultural sectors, which are some of the most productive in the world (figure 1.4). In theseindustries, physical capital often replaced labour in the production process (new machinery on the productionline) and scientific advances significantly expanded physical output (fertiliser or new crop types in agriculture).
To some extent these forces operate in service industries too. Technology can replace people for sometasks (such as the use of Artificial Intelligence (AI) in banking and formerly ATMs), reducing the overall costof a service. Digital communications can provide scale (say in university education) allowing for expansion ofservices at low marginal cost.
Figure 1.4 – Australian mining and agriculture have very high productivitya,ba. Goods sub-sectors

b. Services sub-sectors

Labour productivity rank (out of 25)
0

5

5

10

10

Rank

Rank

Labour productivity rank (out of 25)
0

15

15

20

20

25

25
1995

2000

Agriculture

2005

2010

Manufacturing

2015

1995

MiningDistribution services
Business services

2000

2005

2010

2015

Industrial services
Personal services

a. Distribution services are transport and postal, IT and telecommunications and retail and whole trade; industrial
services are construction and utilities; personal services are food and accommodation and arts and recreation; andprofessional services are professional, scientific and technical services, real estate, finance and administration andsupport services. b. See notes c and d in figure 2.7 of volume 2.

And indeed, although we think of them as distinct, the service sector is closely linked to the goods sector. In
many cases, service sector productivity growth will occur because of new and improved physical products(goods) that are used to deliver a service. Many goods are valuable because of their capacity to deliver
higher quality or lower cost services — modern coffee machines can allow access to a wider variety ofbarista services, for example. In addition, many goods are differentiated based on their attached wraparound7

5-year Productivity Inquiry: Advancing Prosperity Inquiry reportservices, rather than solely the physical characteristics of the good itself — think of Apple hardware, that islargely generic but aesthetically pleasing, and its bundled proprietary software.6
But in many cases, productivity gains in services — particularly non-market services — take the form of
quality improvements and greater variety of novel products more so than real cost reductions. Recent history
has borne this out:
• The productivity improvements of expanding health, education and public administration non-market
services are typically realised as improved quality (e.g. a modern doctor is better able to improve patient
health outcomes in a single hour than they could in the 1980s).
• Many digital services deliver benefits by improving the quality of the user experience rather than justreducing the inputs required to provide the service (e.g. in the case of Amazon or Netflix, much of thevalue-add comes through the increased convenience of the online experience).
• The benefits associated with new technologies such as AI, to the extent that they augment as much as
replace human labour, could predominately come through better quality service provision rather than
reducing the capital and labour cost of the service (though some cost reductions should be possible).
Even where services are integrated with physical products, it is often the service element that proves hardto transform. In health, for instance, considerable innovation has occurred through medical technology —pharmaceuticals, imaging equipment and pathology — with flow-on benefits to service quality; butinnovation in the configuration of the service itself — through digital or communications technology — hasbeen slower to emerge.
From a practical perspective, the need to focus on quality is in part, out of necessity. Many services need to
be delivered face-to-face and/or are customised, and so there is less scope to automate them or achievesignificant economies of scale.
To the extent that future productivity is driven more by improvements in quality and novelty (more so than
reductions in cost) than it has been for goods historically, we may need to think differently about how to
enable productivity growth going forward.

A changing climate and heightened global tensions
A changing climate
and heighted
global tensions

Combatting climate change will weigh on productivity growth

Global barriers to trade are rising

Climate change and the need to decarbonise our economy will shape Australia’s productivity performanceand weigh on its growth in the short term. By some measures, the threat faced by Australia from climatechange may be larger than for other major economies (figure 1.5). The changing climate will directly affectproductivity growth in a range of industries, including agriculture, fisheries, and tourism, and be a drag on the
productivity of industries that rely on physical labour in heat-exposed environments.

6 Standard National Accounting methodologies mismeasure or do not count some of the benefits associated with quality

improvements and the introduction of new products, it is difficult to empirically estimate and assign the contribution of
those benefits to goods and services respectively.
8An agenda to lift Australia’s productivity

Figure 1.5 – Australia’s comparative preparedness for a low-carbon transition
Economic exposure and resilience to transitional risk in Australia and OECD countriesa
0.7

0.6
CRI
PRT
HUN
ITA
SVN
SVK
LVA
ESP CZE

Resilience

0.5
0.4

LTU

0.3

COL
GRC
TUR MEXCHLPOLISR CAN
EST
FRA
BEL
IRL
AUS
JPN KORAUTFIN SWE DNK USA
DEU

0.2

NZL

NOR

CHE
GBR

0.1
0

0

0.05

0.1

0.15

0.2

0.25
Exposure

0.3

0.35

0.4

0.45

0.5

a. OECD country abbreviations are: Australia (AUS), Austria (AUT), Belgium (BEL), Canada (CAN), Chile (CHL),
Colombia (COL), Czech Republic (CZE), Denmark (DNK), Estonia (EST), Finland (FIN), France (FRA), Germany (DEU),
Greece (GRC), Hungary (HUN), Iceland (ISL), Ireland (IRL), Israel (ISR), Italy (ITA), Japan (JPN), Korea (KOR), Latvia(LVA), Lithuania (LTU), Luxembourg (LUX), Mexico (MEX), Netherlands (NLD), New Zealand (NZL), Norway (NOR),
Poland (POL), Portugal (PRT), Slovak Republic (SVK), Slovenia (SVN), Spain (ESP), Sweden (SWE), Switzerland(CHE), Turkey (TUR), United Kingdom (GBR) and United States (USA).

Achieving net zero emissions in coming decades will have important implications for measured productivity.
It requires new capital investment and rapid innovation, in part to replace (rather than add to) existing capitaland production processes. Because the cost of carbon emissions has not been reflected in GDP or businessprofits, abatement efforts could, in many instances, increase the cost of production and could put downward
pressure on measured productivity, at least in the short term.
Moreover, productivity measurements can provide misleading indicators of the longer run value of investments
in physical and intangible capital if the costs come now and the benefits later. (The mining investment boom
was characterised by this — huge investments upfront with productivity improvements that emerged over time.)Thus, decarbonising the economy could reduce measured productivity growth in ways that reflect the
shortcomings of GDP as a measure of wellbeing (environmental impacts, such as through increased carbon
emissions, are often poorly measured or not measured at all in economic statistics — see volume 2,
chapter 1). But this is not the whole story. Decarbonising will impose real costs over many years, if not
pursued via the most efficient path.
The technologies required to get to that goal are not fully developed, and the relative costs of different
abatement options are constantly evolving. Governments and businesses cannot simply choose from astable menu of low-cost options.
The challenge for policy makers is to create broad-based incentives to identify and implement the lowest
cost abatement options, with flexibility to adapt to changing technological circumstances. In the absence of asingle, explicit carbon price, this means taking a portfolio investment approach based on transparent
assumptions about the implicit costs and benefits of existing and future abatement measures (per tonne of
CO2 abated). The higher the cost effectiveness of abatement strategies, the more successful will beAustralia’s efforts for any given budget.
95-year Productivity Inquiry: Advancing Prosperity Inquiry report

Meeting the challenge of climate change will require coordination across all levels of Australia’s
governments, policy settings that encourage wise investments in least-cost abatement and adaptation andmultilateral oversight of the abatement contributions of other countries.

Global barriers to trade are rising
The period following the Second World War provided large tailwinds to global productivity growth for many
subsequent decades, through the diffusion of new technologies and the expansion of trade, underpinned bya global rules-based order. This has had benefits for small economies like Australia, particularly as we
reduced our own barriers to trade, notably in manufactured goods.
Recent global trends — including heightened strategic concerns in our region, war in Europe, COVID-related
supply chain disruptions and high global inflation — have stalled the momentum of multilateral trade andinvestment liberalisation and prompted some reappraisal of supply risks. There has been a shift in policy
among key trading partners, including the United States, with a much greater emphasis on supporting
domestic production in key sectors (such as semiconductors and green technology) through subsidies andlocal content rules.
These developments are a challenge to global prosperity. They re-shape the supply chain strategies of local
businesses and create policy dilemmas for governments around the world, including Australia. Nonetheless,
we are arguably well positioned to navigate them. Policy transparency and a clear sense of our comparativeadvantages will be key to managing this evolving global order.
More generally, there are strong arguments against Australia joining a global ‘arms race’ of industry
subsidies. This is particularly so when other large economies are subsidising sectors that are not necessarilyin Australia’s traditional areas of comparative advantage (as a resources exporter and aspiring highproductivity services economy).
Australia has a big opportunity from finding ways to open more to the world, even in this changing global
context, particularly given our proximity and links to large, rising income economies in southeast Asia andIndia. The movement of goods, capital and people will continue to be important pathways for sharing
knowledge and innovation in the global economy.
This reflects future sources of productivity growth, but also our history. Australia’s policy experience with a‘fortress Australia’ mindset (including high tariff walls, and restrictive immigration policies) led to Australia’s
economic performance falling well below peer countries in the decades leading up to the 1980s.7

7 Australia’s average GDP per capita growth between 1970 and 1980 was about 1.3% compared with 2.7% in the G7(based on an unweighted average of growth rates across the G7 countries).
10

An agenda to lift Australia’s productivity

1.3

A policy agenda for a more productive Australia
Factors influencing the Commission’s choice of focus area

Determinants ofmarket growth

HumancapitalInvestment

Innovation

Laws andregulations

Taxes andspending

Institutionalsettings+
Role of Government
in markets+
Headwinds to
productivity

Rise ofservices

Climate change andgeopolitical tensions

Australia’s challenge is to raise the long-term rate of productivity growth. Therefore, the focus must be on thelong-term fundamental enablers of productivity, and the role of government in reinforcing these.
Whether in the services sector (market or non-market), the resources sector, manufacturing, or agriculture,
productivity increases come from:• workers developing better skills• businesses or government investing in more technology and equipment• new ideas being developed, and the spread of good ideas to more businesses or more areas ofgovernment: management insights, technical knowledge, new technologies — for example, better solar
cell technology allows us to harness solar resources more effectively.
The policy agenda presented here is based on applying these enablers to Australia’s current economic andpolicy context — the productivity predicament.

The reform package

The policy agenda for a more productive Australia

Building an
adaptable
workforce to supply
the skilled workers
for Australia’s future
economyHarnessing data,
digital technology
and diffusion tocapture thedividend of new
ideas

Creating a more
dynamic economy
through fostering
competition,
efficiency andcontestability inmarkets

Lifting productivity
in the non-market
sector to deliver
high quality services
at the lowest cost

Securing net-zeroat least cost to
limit theproductivity impact
caused by climatechange11

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Responding to Australia’s productivity growth challenges involves action on many fronts. The need to foster
productivity in some hard-to-reach areas (services and the non-market economy) requires somebroad-based enablers as well as some new thinking.
The reform agenda centres on five key themes:
1. Building an adaptable workforce to supply the skilled workers for Australia’s future economy.
A highly skilled and adaptive workforce could be one of Australia’s most important competitive advantages. It
is an enabler of balanced growth and is particularly salient in those parts of the services sector that are
traditionally labour intensive. Skilled labour can work with, and adapt to, technology; but also add greater
value in performing the tasks that only people can do.
2. Harnessing data, digital technology and diffusion to capture the dividend of new ideas.
Policy should broaden beyond traditional channels for the generation of new ideas (including public andprivate research and development) and focus on the 98% of businesses that do not introduce new to theworld innovation. The diffusion of ideas, their adoption and adaptation by the broad mass of Australianbusinesses is the main game in productivity policy. The uptake of digital technology is a key example of this,being supported by government data policy, infrastructure provision, use of regulatory technology (regtech)and cyber regulation.
3. Creating a more dynamic economy through fostering competition, efficiency and contestability in markets.
A dynamic economy is arguably the most effective diffusion machine, spreading new ideas throughcompetition, trade, investment and labour mobility. Multiple policy areas can help foster business entry,
expansion of efficient businesses and create incentives for productive investment. Some of these policy
levers are general enablers like tax or land use regulation; others deal with barriers to competition that are
specific to a particular sector.
4. Lifting productivity in the non-market sector to deliver high quality services at the lowest cost.
Innovation can be hard to achieve in parts of the non-market sector, as can the diffusion and spread of goodpractice. In some cases, building the right innovation ‘infrastructure’ is a key part of driving a greater cultureof productivity growth in government. Even identifying modest ways to economise on labour in the delivery ofsome core services will be an important direction for reform.
5. Securing net-zero at least cost to limit the productivity impact caused by climate change.
Decarbonising the economy will require a large economic transformation over the next three decades asAustralia pursues its 2050 Net Zero Emissions Target. Having the broad-based policy frameworks to reduce
emissions and adapt to climate change at the lowest possible cost is a high priority for productivity growth.
These five enablers bring together 71 recommendations, resulting in a wide-reaching agenda for reform.
Some recommendations are about bringing a hitherto underappreciated issue to greater prominence. Others
are about changing the emphasis of existing policy approaches.
Our recommendations are geared towards the productivity challenges outlined in section 1.2, as well as the
emergent opportunities for productivity growth.

12An agenda to lift Australia’s productivity

Building a skilled and adaptable workforce
Improve quality in the education and training system to build human capital andincrease the productivity of workers
Recalibrate skilled migration to fill skill gaps, improve matching and bring new
ideas to the workforce

Get the gig economy right for both workers and consumers

Streamline workplace relations and occupational licensing to enable flexibility
in the labour market

Only a few generations ago, significant parts of the workforce were largely trained on the job to do relatively
routine tasks, with fewer requirements for formal education, for example in manufacturing and agriculture.
Those sectors effectively took workers with low average formal education and provided them with relatively
high paying jobs, largely because their labour input was augmented by capital (and land) and scientificadvances that could generate greater output from the labour provided.
Many parts of the modern services sector have less of that flavour. These industries tend to be labour
intensive overall, and high paying services jobs tend to have non-routine tasks and require high formal
qualifications (figure 1.6). Where labour input dominates, there tends to be a premium on the skill of thatlabour — higher skilled workers tend to be more productive and higher paid.
Today, an estimated nine out of ten new jobs will require post-secondary qualifications of some kind.
Where technology is introduced, skill requirements tend to rise. Technology can substitute for labour but also
complement it. The addition of technology can replace individual tasks (more often than entire jobs), freeing
up workers to focus their efforts where they are most valuable.
As routine tasks continue to be automated, it is likely that newly created jobs will increasingly rely on
distinctly human attributes like interpersonal skills, synthesis, judgement and critical thinking. Innovation —generating new, economically useful ideas — is particularly hard to automate.
These attributes are generally learned in the context of a particular application and are built on a foundationof strong literacy and numeracy, a knowledge-rich school curriculum and considerable tacit learning on thejob. Services involve a degree of co-production between the producer and the consumer: inter-personal skills
and empathy can be a key part of the overall value.

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5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Figure 1.6 – Non-routine roles are on the risea
45
Non-routine cognitive

Share of employment (%)

40
35

Routine manual

30
25

Routine cognitive

20
15

Non-routine manual
10
5
0
1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

a. Based on a mapping from ABS labour force to Australian and New Zealand Standard Classification of Occupations jobclassifications. Non-routine, cognitive: Managers, Professionals; Non-routine, manual: Community and Personal Service
Workers; Routine, cognitive: Clerical and Administrative Workers, Sales Workers; Routine, manual: Technicians andTrades Workers, Machine Operators and Drivers, Labourers.

These trends imply a premium on adaptability. As jobs evolve, workers must too.
Australia’s education and labour market settings have served us well until now, but meeting the needs of themodern economy means catching up to these realities.
In a world requiring broad capabilities and adaptability, some policy settings still focus on narrowly defined
occupations. Vocational training, industrial awards and occupational licensing have traditionally beenpremised on an ability to define the precise roles and competencies of occupations. Skilled migration has
relied on occupation-based lists to define the economy’s needs.
But a productivity lens sees the role of human capital differently. Skills that combine technical mastery withbroad capabilities and adaptability are critical, as is the flexibility to apply those skills in ever-evolving ways.
Education policy, migration settings and labour market regulation should be designed with that focus.

Improving the education and training system
Education plays a key role in boosting productivity through the quality of ‘human capital’ (the collective skillsof the workforce) applied to the production of goods and services. Arguably, education is the most profoundgeneral-purpose technology ever developed — the ability to transfer knowledge from one individual toanother in an accelerated way, simultaneously building the capability for further learning.
The four parts of the education ‘system’ — schools, higher education, vocational training and lifelong
learning — work together to help deliver the skills and capabilities needed for a modern economy. Targetedreforms can ensure that each element works better, and that the system itself can work more coherently.
Two historical trends stand out.
First, over recent decades, Australian human capital has been bolstered mainly through the quantity of
inputs — increasing the number of years of schooling, the share of the population enrolled in post-secondary
education and increasing per student funding.

14

An agenda to lift Australia’s productivity

However, there are only so many years of formal education Australians are able and willing to do, and only
so many resources (teachers and capital) that can be devoted to education. There is some remaining
quantity dividend (in universities and in lifelong learning) but for the most part, delivering on Australia’s futureskills needs will require a tighter focus on increasing the quality of education for each dollar spent.
Second, while many parts of the economy have been dramatically transformed by technology and new
business models, the basic structure of education delivery is remarkably similar to what it was many decadesago, whether in schools or in higher education. The disruption caused by COVID-19 has prompted a greater
focus on the potential use of technology, not only to improve instruction and formative assessment, but toalter the way schools and tertiary education providers deliver their services.

Improving access to, and quality of, higher education
A range of targeted reforms to tertiary education could position providers to deliver a higher quality, moreinnovative and responsive service to students. Funding reform is a key part of this.
Despite large increases in student numbers in the last decade, further increases would still yield benefits.
Reforming university funding arrangements would facilitate expanded access for Australians to tertiary
qualifications. It would also facilitate more competition and address the unintended consequences that result
from university efforts to manage the course mix — a response to the poor incentives embedded in thecurrent funding model.
Through differing funding arrangements across the sector, governments have made various attempts to
influence student choice of course and career. For the most part, these efforts are ineffective. Nor are they
always desirable — students generally make reasonable choices and government skill lists are an imperfectguide to the needs of the future economy. Moreover, student choices are typically unresponsive to pricechanges at current levels — meaning that the existing approach to subsidies is neither effective nor efficient.
Governments should establish an effective and fiscally sustainable demand-driven system for providing
Commonwealth supported places for domestic undergraduate students. This would better support students
with reasonable prospects for success at university, with productivity benefits for the economy and higher
lifetime wages.
Complementing this, governments could, through a new university funding model, better target investment while
facilitating wider access to higher education. Under this model, total funding per student should be based on ameasure of the efficient cost of delivery and the student contribution to this should increase with their future
average expected earnings. A higher average student contribution — largely financed by income-contingent loans(so that higher prices do not deter study) — would be necessary to expand access while containing fiscal costs,
and would be fairer, given the size of the private returns to education (reform directive 3).
In addition, there should be a proactive policy emphasis on enhancing the quality of education services
provided. For a range of reasons, universities may not have adequate incentives to focus on quality teaching.
While higher education providers in Australia perform well on many dimensions of quality (students are largely
satisfied and have good employment outcomes), there are large variations across providers and a significant
minority of higher education students rate their experience poorly.
Lifting the quality of tertiary education requires changing the incentives that individual teachers and their
institutions face, which are shaped by government funding and regulation. This requires a multi-pronged
approach.
The Australian government should require universities (and appropriate parts of the Vocational Education
and Training (VET) sector) to, at no additional charge to students, share all lectures online. This would

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5-year Productivity Inquiry: Advancing Prosperity Inquiry report

improve the transparency of teaching quality and provide an incentive to invest in, and improve, teaching
performance (reform directive 4).
A stronger external teaching quality assurance role for the regulator, and better published quality indicators
would also support improved teaching performance, as would the Australian Education Research
Organisation collecting and generating evidence on best practice. Funding research and rewarding
innovation in teaching could be achieved through a modest Australian Research Council grant and building
on successful approaches already implemented by Australian universities.
Governments should hold off implementation of the proposed performance-based funding of universities —which would encourage gaming, can be unfair and lacks impact — and instead explore the option of financial
rewards for providers that have made successful efforts to improve teaching quality (reform directive 5).

Supporting a responsive VET system
Notwithstanding the strong growth of higher education, VET remains the largest provider of formal
post-school training, serving more than twice the number of university students. Given this, overcoming
systemic flaws in VET design is important.
Recent skills reforms are wide ranging and are designed to fundamentally re-shape the VET sector so that itis better able to teach, recognise and develop adaptive skills. The measures, if successfully implemented,
will overhaul competency-based training as well as change the existing qualification framework and update
training package content and development. Governments should ensure that cross-sectoral skills areprioritised, as well as promptly updating training packages (reform directive 7).
A more ambitious and sophisticated system will also necessitate investment in VET workforce capability.
VET teachers and trainers will need further professional development support as the system adopts
assessment models that include proficiency and independent assessment.
Beyond this, governments should gradually expand access to income-contingent loans to more VET
students starting at the Diploma level, in part, so that expanded access to higher education does not come at
the expense of VET. More equal loan access would give students a choice between different parts of thetertiary education sector based on capabilities, interests and skill needs, rather than financial barriers andarbitrary differences in government funding and financing policy.

Creating a culture of lifelong learning
Lifelong learning is a key part of Australia’s education system but is perhaps the least well understood. It isalso the area of education where policy is least developed. Nonetheless, it is a vitally important element ofskills formation through a worker’s life.
At present, education funding is concentrated on school education and the initial acquisition of formal
qualifications through universities and VET. This is generally appropriate, but raises the important policyquestion as to whether more funding support should apply to ongoing training and if so, how it should betargeted and designed.
There is some risk that businesses will under-invest in ongoing education and training because they cannot
capture the full benefit if the worker changes jobs (by one estimate, today’s school leavers could have
17 employers during their working life). This could be particularly true where the training in question provides
general skills (such as management) to complement an employee’s existing specialist professional training.
More generally, there can be financial barriers to people seeking to learn over their lives.
There is a role for government in helping create a culture of lifelong learning as part of a joint effort withbusinesses and individuals. Many people already engage in lifelong learning, so it is important that any

16An agenda to lift Australia’s productivity

government assistance generates additional investment in upskilling and reskilling, as opposed tosubsidising learning that would have occurred anyway (reform directive 4).
Action by governments on many fronts is required: providing quality, consolidated information as to thetraining options on offer (reform directive 5) and encouraging universities to provide more ‘nested’
qualifications for those who complete part of a course (reform directive 6). In addition, governments should
continue exploring targeted financial assistance through business- and individual-based tax breaks —evaluating channels like the Skills and Training Boost and incrementally expanding the use of deductableself-education expenses (reform directive 4).
There is a complex myriad of supports for lifelong learning. It is important to bring together existing measures
into a more coherent strategy. A more unified approach, backed by co-operation between the Australian andState and Territory governments could bring focus to this policy effort, reducing overlaps and filling gaps inpolicy coverage to increase uptake.

Make best practice common practice in schools
School education provides the foundation from which further study builds. It also contributes to well-being
and the ability to effectively navigate everyday life.
However, academic achievement among children is stagnating while resourcing (per student) has increased,suggesting that the productivity and effectiveness of schools has been declining in recent years.
One way to envisage the challenge for the school system is to compare it to the dramatic improvements
achieved in respect of health and longevity over the past century and a half. That health transformation cameabout through scientific and technological advances, improved medical professionalism, and multiple publichealth interventions. What could the equivalent transformation look like in respect of education?
To achieve change will require more effective use of school resources, including freeing up teachers’ timefrom low value tasks and administrative burdens to focus on quality teaching. The most likely drivers are
increased use of effective educational technology; an improved evidence base that more directly informs
day-to-day teaching practice; and innovation and disruption in models of schooling.
Digital technologies hold promise — to augment teacher-led instruction, provide formative assessment ofstudent progress and replace some manual administrative processes (reform directive 1). Digitaltechnologies can expand access to quality teaching and help address the difficulties associated withteaching out of field. The uptake of digital technology through COVID-19 shows that rapid (albeit temporary
in this case) transformation of the school model is possible.
But not all technology is necessarily effective. There is a role for government to provide guidance toteachers, schools and systems about digital learning options with proven efficacy.
Governments can also help to enable best practice to be common practice across the education system.
Diffusing best practice is challenging. Sharing teaching expertise through observation and feedback is part ofaddressing this. So too is the design and dissemination of high-quality, evidence-based teaching materials
such as lesson plans for use in the classroom. This approach would rely less heavily on individual teachers
to work out how to best translate the national curriculum into lessons — a task that teachers are not always
able to do effectively given the many demands on their time (reform directive 1).
Finally, we should be open to a degree of innovation in models of schooling. This could include different
governance structures, or different delivery options such as online lessons (at home and in the classroom),
variations in school hours, and use of technologies to personalise students’ learning environment. As a first step,
governments can ensure there are no unnecessary barriers — legislative, regulatory, administrative or otherwise17

5-year Productivity Inquiry: Advancing Prosperity Inquiry report— that prevent schools from experimenting in ways that better enable students to learn. New trials should also
incorporate evaluation and diffusion of school-based innovations that are proven effective (reform directive 2).

Recalibrating skilled migration
Australia is an attractive location for skilled migrants. As a safe, high-income economy with a multiculturalcommunity and a track record of absorbing population growth (well above the OECD average), we have an
ability to use skilled migration as a policy tool. Immigration is, among other things, a key economic asset,
which should be used to good effect.
Using the skilled migration program to boost productivity requires a shift of emphasis. It requires that we see
skilled migration not just in terms of filling specific occupational gaps, but also (and more so) the role migrants playas an essential source of new ideas and information. Through experience with frontier technologies and different
management approaches developed and practised overseas, skilled migration is a key driver of the effective
diffusion of knowledge and new technologies across the Australian economy (reform directive 8).
Currently, migration program settings that are meant to meet the needs of the labour market are heavily
reliant on skilled occupation lists to restrict the scope of both permanent and temporary skilled migration. In
many instances, skill lists fail to effectively track labour market shortages.
To improve the productivity dividend from skilled migration, the Australian government should move awayfrom relying solely on skilled occupation lists for both temporary and permanent skilled migration. Instead,the Australian government should introduce wage thresholds for employer-sponsored skilled migration(including age-contingent wage thresholds for sponsored permanent migration), removing list-based
restrictions above those thresholds.
Settings for independent permanent migration should also be amended to place more emphasis on ongoing
employment and income (as opposed to qualifications alone) as well as age.
Moreover, a better-designed temporary skilled migration visa that could meet the needs of migrants andemployers alike could reduce reliance on permanent migration (which typically entails greater fiscal risks
related to the older average age of permanent migrants). In particular, the duration of temporary migration
could be increased, offering a viable alternative for workers at different stages of their work-life.
A range of other steps should also be taken to improve the composition of the migrant intake. The
Australian Government should abolish visas with a poor rationale and questionable benefits, such as theBusiness Innovation & Investment permanent visa program (which does not achieve its policy aim and haspoor fiscal outcomes).
Finally, the Australian Government should eliminate unnecessary barriers that impede the immediate employmentof newly arrived migrants by streamlining the processes that recognise qualifications from abroad.

Getting the gig economy right
The gig, or platform, economy has been a prominent source of disruption in multiple markets.
Like all disruptions, it has brought benefits and prompted some concerns. As noted in section 1.2, innovationin the services sector often involves fundamental changes to business models and the way consumers
experience a service. As a result, it can test regulatory frameworks; regulators have to show similar
adaptability to that required of the workforce as a whole.
Platform work can contribute to productivity through improving matching efficiency in service markets andspurring technological innovation by platforms and their competitors. It allows for better quality services andconvenience for consumers and has introduced competition to otherwise stagnant markets.
18

An agenda to lift Australia’s productivity

While the most prominent examples of platform work are ridesharing and food delivery, platform work exists
in other industries, with different work arrangements and work characteristics, including aged and disability
care, professional and trade services, specific tasks and odd jobs. Conditions and pay also vary greatly
across industries (figure 1.7).
Figure 1.7 – Platform workers’ earning rates vary by type of worka
Median earnings per hour in 2019
Personal services
Sales and marketing support
Professional services
Education
Creative and multi-media
Software development and technology
Skilled trades work
CaringOdd jobs and maintenance work
Writing and translation
Transport and food delivery
Clerical and data entry
0

10

20
30
Dollars per hour

4050

a. Estimates from the National Survey are approximate only as it is unclear whether respondents reported gross or net
earnings after cost, some respondents may work for platforms in different categories of work, data is categorised by thetype of main platform, and the sample size is low.

The concern about platform work is that as contractors, platform workers have limited access to certain
employment rights and entitlements.
But simply imposing employee status in all cases would effectively erode many of the productivity benefits
and flexibility for workers that arise from platform work as currently arranged.8
Calibrated government intervention could address some of the regulatory gaps created by platform work,
while maintaining its productivity benefits. For example, given that the provision of insurance can beinsufficient under current arrangements — either where platforms or individuals fund their own workers
insurance — a more comprehensive solution could come in the form of a mandated baseline level of
insurance, an industry-wide insurance scheme, or extension of workers compensation. Governments should
evaluate this possibility for classes of platform work where there are material risks to worker safety, where
there are many platform workers and hours worked, and where workers are low paid.
Similarly, where access by platform workers to dispute resolution services is particularly poor compared with
employees, governments should encourage platforms to improve their own internal resolution processes. Thisshould be backed by an independent dispute resolution body within the Fair Work Commission, to provide
conciliation and arbitration services, with such services to be funded by platforms (reform directive 12).

8 Contractors generally cannot access employment entitlements, such as legislatively guaranteed minimum pay andconditions, access to workers compensation or unfair dismissal laws and the ability of platform workers to access dispute
resolution processes, insurance arrangements and workplace health and safety oversight and advice can be difficult.
19

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Streamlining workplace relations and occupational licensing
Reforms to skilled migration, schools and tertiary education are essential for building an adaptable andproductive workforce. But maximising the benefits of those reforms requires policy settings that better
facilitate the free movement of people across jobs, businesses and occupational roles. This includes theability of businesses and workers to adapt existing jobs to improve work practices and productivity.
The workplace relations system must continue to enshrine minimum standards of fairness and ensure that
opportunities to improve productivity are not eroded by conflict, missing incentives or red tape. Part of how
this is to be achieved is by placing a high emphasis on co-operation between parties.
There are three broad areas where greater ongoing incremental reform can create opportunities forbusiness-based productivity improvement: the award structure, the ability to make a formal enterpriseagreement, and the content of those agreements (figure 1.8).
In general, the move to enterprise level bargaining over the last 30 years has been a significant source ofbusiness-based (and economy-wide) productivity. However, the share of workers covered by enterpriseagreements has fallen in recent years, and a large proportion of agreements are simply rolled over, so thescope for them to improve productivity depends on whether existing clauses leave room for future flexibility.
The reduction in enterprise bargaining warrants a policy response.
That response starts with a strong renewed focus on the award system itself. First, many businesses andworkers will likely always remain in the award system. For low paid workers, strong award compliance is of
critical importance: simpler awards and the continued encouragement of award regtech solutions are key. Foraward-reliant workplaces to access flexibility, they need simpler awards and easier processes to amend them.
Second, the structure of awards forms the baseline for enterprise agreements via the Better Off Overall Test.
Simpler, more adaptive awards can indirectly smooth the path for mutually beneficial enterprise bargaining.
Figure 1.8 – Awards have grown in importance for non-managerial employees

Share of non-managerial employees (%)

2010–2021
50

46

45

43

45

41
38

40

37

40
37

37

36

37

35

30
25
20

20

25

23

22

18

16

15

10
5
0
2010

2012
Award

20

2014
Enterprise agreements

2016

2018

Individual arrangment

2021

38

An agenda to lift Australia’s productivity

To these ends, the Australian government should amend the Fair Work Act to improve award-making processes,
and further simplify and adapt awards where feasible (reform directive 11). A positive recent development in theaward system was the inclusion of loaded rates in the Hospitality Award — effectively providing options toaward-reliant businesses to pursue a specified alternative pay structure. More use could be made of such optional
approaches, overseen by the Fair Work Commission, and enshrining consultation requirements.
In addition, the Government should remove barriers to effective agreement-making in the enterprisebargaining system by modest changes to the Better Off Overall Test. The Fair Work Commission could have
expanded ability to approve an agreement where there is overall employee support and overall benefits,subject to a range of public and private interest tests.
Enterprise bargaining could be better leveraged to improve productivity through limitations on certain typesof clauses that hinder productivity improvement. For example, some enterprise agreements contain
restrictive consultation clauses that require majority employee consent to implement changes in work
practices. Such clauses can block the adoption of more efficient production processes, especially where they
may be labour saving. The Commission’s proposed solution is to give the ‘model’ consultation clauseprescribed in the Fair Work Regulations 2009 legal effect over more stringent terms in agreements. This
would both promote productivity enhancing changes without stifling mutually beneficial consultation between
managers and their employees. The Government should also remove barriers to effective agreement-making
in the enterprise bargaining system by modest changes to the Better Off Overall Test. The Fair Work
Commission could have expanded ability to approve an agreement where there is overall employee support
and overall benefits, subject to a range of public and private interest tests.

Simplifying and harmonizing occupational licensing
Australian governments have implemented a significant reform of occupational licensing through theautomatic mutual recognition of several licences across (most) state borders (reform directive 9). There is
scope to expand this principle to also enable the targeted recognition of overseas licences.
A further (and harder) reform is to tackle where licences and professional registration are truly necessary,and the scope of practice that should be covered.
Licensing plays an important role in signalling quality and ensuring minimum standards of safety. But
excessive and rigid requirements reduce the flexibility with which workers can move between sectors andjobs, and can inhibit competition, which tends to increase prices compared with a market with a voluntary, orno, regulatory licensing regime.
When designed well, the higher price imposed by licensing regimes is justified by the lower risk toconsumers. However, if the objectives of licensing regimes are already achieved by other means such as
safety legislation, or if the extent of the restriction is not matched by improved outcomes (or worse, actually
impedes the provision of safer or higher quality work), then licensing reform — such as expanding scope ofpractice for other providers — could improve productivity without compromising service quality and safety.
Building on automatic mutual recognition, governments should continue to develop digital licensing platforms tofacilitate more information sharing and help pave the way for further integration of licensing across jurisdictions.
There is also substantial potential productivity benefit in the hard grind of ongoing review of licensing policy,
to test whether licensing is necessary (over and above other available forms of safety regulation andconsumer protection) and whether requirements remain fit for purpose (reform directive 10).
Expanding scope of practice to increase healthy competition
The scope of practice covered by a licence determines the types of services that are regulated, and hence,is a key determinant of how accessible and affordable these services are. A perennial pair of problems in this21

5-year Productivity Inquiry: Advancing Prosperity Inquiry reportcontext is that (i) some suitably skilled practitioners are not licensed to provide certain services, and (ii) somelicensed practitioners are not operating on the boundary of their licence.
For example, in the health sector, nurse practitioners (NPs) can perform many tasks that only generalpractitioners (GPs) — who are in relatively short supply — are licensed to provide, such as diagnosis andprescribing services. This means that GPs undertake many tasks well below the upper boundary of theircapabilities while NPs have skill sets that are not fully utilised. This can result in patients facing needlessly
long wait times and higher than necessary prices, and taxpayers footing unnecessarily high medical bills. A
similar situation exists for pharmacists with respect to their ability to perform some straightforward tasks thatwould otherwise be performed by a GP.
In health services, States and Territory Governments should trial expanded evidence-based scope ofpractice for pharmacists and other non-medical health practitioners, such as those undertaken in New South
Wales and Queensland with regard to the prescription scope of pharmacist’s providing vaccinations andlow-risk medications. The Australian Government should ensure that the novel arrangements that are thesubject of these trials are given sufficient funding through Medicare or the Pharmaceutical Benefits Scheme(PBS) (reform directive 10).
More generally, Australian governments should work with their regulators to re-examine boundary issues
relating to occupational licenses, particularly where independent reviews have already highlighted potential
gains (reform directive 10). In continuing to develop their digital licensing platforms, governments should
prioritise choices in technology and design that enable data collection that can inform effective licensing
policy and future information sharing between jurisdictions.
Faster recognition of migrant qualifications
Suitably licensed skilled migrants represent a potentially fast and efficient way to augment domestic labour
supply, increasing productivity via diffusion and skill sharing, and improving access to technical services forAustralian businesses and consumers.
At present, the system that regulates mutual recognition of migrants’ qualifications acquired overseas,
including occupational licences, is not well integrated with the requirements for skilled migrant entry. Before
skilled migrants can work in Australia, they need to obtain a second set of approvals via an often opaque,difficult-to-navigate and time-consuming process. The upshot is long delays before migrants can begin workor suitably skilled migrants being unable to work in the field and occupation in which they were trained, to thedetriment of Australia’s economy.
Where there is sufficient alignment or equivalence of different licensing regimes between Australia andinternational jurisdictions then mutual recognition should be pursued by the Australian Government. Such anarrangement would do away with the secondary approval process for suitably qualified migrants, while
preserving the benefits of licensing in promoting safety and quality of service (reform directive 9).
The Australian Governments and regulators should pursue further international mutual recognition ofoccupational licences by improving (and potentially formalising) links between Australian licensing bodies
and those in similar countries.
Where there is not sufficient alignment or equivalence of different licensing regimes between Australia andinternational jurisdictions and mutual recognition is yet to be implemented, then requirements for migration
should be aligned with the requirements of regulatory licensing bodies.

22An agenda to lift Australia’s productivity

Harnessing data, digital technology and diffusion
Focus on innovation for the 98 per cent to drive productivity gains through the
adoption of new ideas

Address barriers to the adoption of technology to bank the data and digital dividend

Productivity growth relies on innovation and new technology. Across the world, considerable policy attention
and public funding has focused on how to generate new breakthrough ideas. But this leaves out an importantelement of the innovation story. Fewer than 2% of Australian businesses actually engage in‘new-to-the-world’ innovation. This is not a criticism — just a reality.
The critical and forgotten element in innovation strategy is how to stimulate the adoption of new ideas by
the remaining 98% of businesses. There is a major dividend in diffusion — the spread and adaptation of
the ideas of others for use in everyday business applications. Arguably for productivity growth, it is themain game.
The diffusion of digital technologies is a stark example. The adoption of these technologies across the
economy has already been transformative. In just a couple of decades, smartphones have become
ubiquitous, social media has changed the way we communicate and consume, and the volume of data we
can draw on to inform our decisions has increased exponentially. The productivity benefits of digitisation andtechnology enabling us to collect, transmit and analyse data faster and at lower cost, are potentially vast.

Innovation for the 98%
Innovation policy needs to refocus to place more emphasis on the 98% of businesses who are notworld-leading innovators and are unlikely ever to be (figure 1.9). For these businesses, innovation is about
the adoption and adaptation of existing, but more effective and efficient technologies and ways of doing
business, rather than formal research and development (R&D). Policy support focusing on lowering the costof R&D or the commercialisation of patentable intellectual property tends to miss the way most businesses
around Australia innovate on the ground.
Most businesses are not operating at the technological frontier. Supporting the diffusion of existing goodideas and effective business models will help to narrow the gap between them and the best performers,
increasing economy-wide productivity.
The challenge is that the role for government is less clear. Government has a number of established policy
tools that address traditional channels for high-end innovation: formal research and development is
supported by tax incentives and public funding; linkage programs and commercialisation incentives operate
to bring intellectual property (IP) developed in universities to the private sector.
The levers to enable diffusion (the innovation of the 98%) are a multitude of other policy settings, which are
not always primarily focused on innovation per se. The general dynamism of the economy (discussed in alater section) affects the ease with which ideas are diffused and innovations adopted.
But it is important that policy makers also identify and focus on key channels by which knowledge istransferred. For example, improving the skilled migration program and reducing barriers to foreign direct
investment and trade in services would have substantial benefits for diffusion.

23

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Figure 1.9 – Most Australian business innovations are only new to the businessa
Product and process innovation, 2 years ending June 2021
89.0
New to the business only
72.9
6.7

Newtotothe
theindustry
industrywithin
withinAustralia,
Australia,but
butnotnotnew
newto
New
Australia
Australia ortothe
world or the world

Processes
16.4

Products

3.3
New to Australia but not new to the world
7.4
3.1

New to the world
8.4
0

20
40
60
80
Share of innovating businesses (%)

100

a. Process innovations include new or improved methods for producing goods and services; organisational forms; andmarketing methods.

As discussed in the previous section, skilled migrants provide a direct channel of diffusion, bringing knowledge
about frontier technologies and practices developed overseas into domestic businesses. Similarly, linkages
overseas via trade and foreign direct investment (FDI) give Australian businesses access to information andideas about innovation from the global frontier, while also bringing expertise and good management practices.
Minimising trade barriers and FDI fees is important to maintain this channel for diffusion.
In some cases, the need for better diffusion should prompt government to think differently about its traditionalrole. Multiple government agencies collect data from businesses, which — if well curated and presented —could help businesses benchmark their performance against like businesses (reform directive 16). The use of
tailored information with easy-to-understand benchmarking results and qualitative case studies, could be highly
beneficial in spurring the adoption of technology and adapting innovations occurring elsewhere in the economy.
Some Australian Government agencies such as the Australian Tax Office and the Australian Bureau of
Statistics have made progress in this area, but these efforts could be broadened and extended.
Governments can also better leverage the university sector. Existing research and training linkages tend to
focus on identified sectors (often those where innovation already occurs). A better approach would be to
make them more industry-agnostic, to encourage diffusion in some less traditionally innovative sectors(reform directive 16).
A concerted effort to reduce the barriers for academics to consult with private industry, via simplified and wellunderstood processes, could also aid the flow of knowledge, particularly in those sectors where larger scale
joint research or commercialisation of IP is less relevant.
The business community, via industry associations and business networks, is one of the most importantchannels for diffusing information about innovations. Governments could increase their partnerships withintermediaries like industry associations and other advisory or network bodies to create programs thatfacilitate the flow of information (such as capability development initiatives and extension services).
Government could also directly increase the transmission to businesses of information about innovation byrequiring open access to government funded research.

24

An agenda to lift Australia’s productivity

Banking the data and digital dividend
Technology changes rapidly and new productivity-enhancing applications are continuously emerging.
Technologies such as AI, the internet of things (IoT), robotic automation and big data analytics areunderutilised in Australia and could deliver large productivity gains. Addressing barriers to the adoption ofthese technologies, promoting efficient and safe use of data and creating an environment that encourages
digitisation is vital to ensuring future productivity growth.
As always, the role for government must be carefully calibrated. Businesses will make their own decisions as
to the value of investing in new technology. Not every investment works out for every business. But
government plays a large role in driving adoption through its own activities (such as regtech), infrastructure
provision, boosting skills and — perhaps most transformative of all — promoting large scale data availability,
which is the feedstock for much of the digital economy (figure 1.10).
Figure 1.10 – Internet speed and lack of skills are the biggest barriers to adoption
Share of businesses citing each factor as limiting their use of ICTs, 2019-20a
Unsuitable internet speed
Lack of skilled persons within the business
Insufficient knowledge of ICTs
Uncertainty around cost/benefit

Cost of implementation too highLack of access to additional funds
Geographical location
ICT failure

Speed of technological change
Legal issues and risk
Lack of skilled persons within the labour market
0

2

4

6

8

10

12

14

%

a. This chart uses weighted estimates as published in ABS (Characteristics of Australian Business, 2019-20 financial
year, Cat. no. 8167.0).

To maximise the economic and social benefits of digital technologies and data, Australian governments
should reform their approach to digital infrastructure investment, expand the safe sharing of government-heldand funded data, and ensure rules and regulations for the ethical and secure use of digital technology anddata are fit-for-purpose.
Better and more cost-effective provision of digital infrastructure will be important in raising productivity forAustralians living and working in the regions (i.e. outside major cities). Beyond the potential economic gains,improving digital connectivity in these areas will significantly improve wellbeing by enabling higher-quality
delivery of everyday services such as telehealth, online education, online banking and remote work. To thisend, ensuring that the types of investment governments are currently making in regional digital infrastructure
represents the most efficient approach, will be important (reform directive 13).
The current arrangements for government digital infrastructure funding are highly disaggregated across apatchwork of different programs. But there is little transparency about how investment decisions are made,making them hard to assess. Subject to sufficient market testing and maturation of the market, governments25

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

should consider competitive tendering as a more efficient way to deliver digital services to regional andremote areas.
Data holdings — public and private — in Australia have been underutilised due to unclear obligations about
who has rights over the data, and hence is empowered to share and use it, as well as concerns about the safe
transfer of data, and privacy. Initiatives like Australia’s Consumer Data Right (CDR), first rolled out in July 2020,
provide an example of how to successfully overcome these issues. The CDR empowers consumers in thebanking and energy sectors to safely share data collected by a business about them across different productand service providers. In the absence of the CDR, that data would almost certainly be closed to otherbusinesses, effectively stymying competition and innovation by prospective service providers.
Expanding this type of consumer led, ‘safe, but open’ approach to data sharing across the economy,
including to government run and regulated service providers (e.g. health, education, aged care andchildcare) could similarly encourage innovation that lowers the cost, while improving the quality, of service
delivery for consumers. And increasing the depth and breadth of data holdings available for analysis would
underpin better system-level policy decisions (reform directive 15).
Governments also have a role to play in setting the rules relating to the ethical and secure use of technology
and data to foster consumer trust and confidence and ensuring these issues do not become a barrier toadoption. But government intervention such as regulatory requirements should be targeted to high-risk areas
so as to avoid unduly inhibiting productivity-enhancing investment and innovation.
The government has already started to regulate critical infrastructure sectors at high risk of cyber-attack;9
however, these measures will need to be reviewed and evaluated to ensure that the added regulatoryburden does not create a barrier to investment. And streamlining cyber incident reporting via a single
interface would reduce the administrative cost on businesses associated with the current plethora ofreporting requirements to multiple regulators (reform directive 14).
Government can also help guide the ethical use of data and digital technologies, such as AI, facialrecognition and automated processes, while avoiding stifling innovation and giving businesses andconsumers confidence to invest in and use the technology.
Economic dynamism describes the process by which businesses are created, grow and often fail; by which
workers move from one job or one industry to another; and by which capital is deployed to new uses throughinvestment and through businesses trying out new business models.
On some measures — business entry and exit rates, investment and labour mobility — the Australianeconomy appears less dynamic than in the past. The cause of this is unclear and there is unlikely to be asingle solution.
Overall, the general competition law in Australia is well designed and effective. Periodic improvements can bemade, but need to achieve a delicate balance. The potential for unintended outcomes abound. For example,
more restrictive merger laws designed to reduce market concentration could also prevent less productive
businesses from exiting the market. Similarly, large businesses (which implies high concentration) are often thesource of new competition when they move into markets — potentially supporting productivity growth.

9 Security Legislation Amendment (Critical Infrastructure) Act 2021 (Cth) & Security Legislation Amendment (Critical

Infrastructure Protection) Act 2022 (Cth)26

An agenda to lift Australia’s productivity

Creating a more dynamic economy
Freeing up trade and increase foreign investment to increase competition,
improve access to capital and enhance the flow of ideas from abroad

Driving productivity through tax reform to improve labour supply, savings andinvestment decisions, improve ease of entry, and improve risk management
Improving risk management and insurance to increase the coherence ofAustralia’s ‘risk protection system’
Lowering costs with regtech to achieve better outcomes from, and lower
the compliance burden of, regulation
Finding a better approach to location and mobility to allow land to go
towards its highest value use

There are many areas of economic policy that, in principle, could improve the dynamism of the economy,
including some already discussed. The Commission has selected some key areas for particular focus, which
could spark competition and new business models:
•
•
•
•
•

continued openness to global investment and trade, including trade in services
ongoing reform of taxationa new, holistic focus on risk protection and insurance
improving regulation through technology
more efficient approaches to location and mobility.

Freeing up trade and increasing foreign investment
In Australia, new competition and market entry often comes from the rest of the world — either through aforeign entrant investing in the Australian market, or through trade. These are important channels for the
diffusion of frontier innovation. Hence, productivity growth can be advanced by being generally open toimport competition, having low barriers to foreign direct investment, and by advocating for rules-based
systems of global trade.
There are potentially large opportunities in global services trade, particularly in the wake of COVID-19 andthe expanded uptake of remote working. Trade in services can be an export opportunity for Australia (as it
has been in tertiary education) but it can also open up parts of the economy previously regarded as closed toforeign competition. This should be a focus of future bilateral and multilateral trade negotiations and also has
implications for a range of regulatory settings, including skilled migration, recognition of overseas
qualifications (discussed earlier) and domestic licensing requirements.
Australia could also achieve greater openness through increased acceptance of international product standards,
and a gradual reduction in the use of anti-dumping and countervailing measures (reform directive 21).
More generally, tariffs on goods imported into Australia now collect so little revenue that the cost to
businesses from complying with the various administrative requirements is much larger (free trade
agreements reduce many tariffs to zero but only if the importing business files the correct forms). Indeed, forevery $1 in revenue raised by tariffs, the Commission has estimated $0.60 to $1.50 is lost in economic
activity. Accordingly, the Australian Government should unilaterally reduce Australia’s remaining statutory
import tariff levels to zero.

27

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Australia has traditionally been open to foreign investment, as evidenced by relatively high FDI as a share of
the economy compared with global peers. However, official FDI screening and approval processes are seen
as more restrictive than in other OECD countries (figure 1.11).
Figure 1.11 – Australia’s FDI processes were already relatively restrictive in 2020aOECD FDI restrictiveness index
Index 1 = Maximum restrictiveness

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
Luxembourg
PortugalSlovenia
Czech RepublicNetherlands
Estonia
FinlandLithuania
LatviaSpain
Germany
Colombia
Hungary
Costa Rica
GreeceDenmark
United Kingdom
Belgium
IrelandFranceSlovak Republic
Italy
Japan
South Africa
Chile
SwedenTürkiyeOECD - Average
PolandBrazilSwitzerland
NorwayUnited States
Austria
Israel
Korea
Australia
CanadaIceland
MexicoIndia
China
New ZealandIndonesia

0Equity restriction

Key foreign personnel

Other restrictions

Screening & approvala. Australia implemented changes to its screening regime from 1 January 2022.

Australia’s FDI fees are well in excess of cost recovery, which risks deterring FDI flows. Application fees for
proposed foreign investment should aim to recover costs and not be used as a method of general revenue
raising. Application fees for proposed FDI into agricultural land assets should be brought closer into line withother forms of investment.
The COVID-19 pandemic and strategic tensions have focused increased attention on supply chain
resilience. This partly reflects business decisions to source inputs domestically or have more redundancy insupply chains (a move from ‘just in time’ to ‘just in case’). This comes at some cost, but often reflects anefficient response to new (or newly understood) risks. Overwhelmingly, supply chain risk management lies
with individual businesses.
In cases where there are calls for proactive policies to stockpile or support domestic production of strategic
items to deal with national supply chain risks, a targeted and evidence-based response is required. The
Office of Supply Chain Resilience (OSCR) can play a key role in ensuring that rigorous appraisal, a degreeof transparency and a focus on opportunity cost underpin Australia’s response to supply chain issues. The
OSCR should provide cost estimates and develop of a rigorous methodology for considering the broader
incidence of any government support for stockpiling or domestic production as a solution to perceived supply
chain risks (reform directive 21).

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An agenda to lift Australia’s productivity

Driving productivity growth through tax reform
Australia’s taxation settings have a key influence on productivity. By taxing some activities at higher rates
than others, the system can skew incentives and economic activity away from more productive activities.
Governments will inevitably consider changes to taxation from time to time, including options to address theageing population, changing consumption patterns and the need for fiscal repair. When doing so, it will be
important to ensure that decisions are consistent with the broad aim of boosting productivity growth. Aspectsof the tax system that warrant particular attention are those that influence:• skilled labour supply decisions — particularly via income and payroll taxes, which can affect labour
market participation, hours worked, incentives for further human capital investment and incentives tomigrate to Australia. These can be compounded by aspects of the transfer system, which can lead to higheffective marginal tax rates. Other payments, such as childcare subsidies, can alleviate adverse incentives
over some income ranges• saving and investment decisions — which can be distorted due to the varying tax treatment of different
savings options, gaps between the corporate tax rate and marginal personal income tax rates, and differential
tax rates for large and small companies. Corporate investments can also attract different tax treatments
according to statutory depreciation allowances and whether the investment is financed by debt or equity• ease of asset transfers and efficient capital allocation — which can be significantly impacted bytransaction taxes like stamp duty. These taxes can hamper worker mobility and housing choice and be abarrier to transactions that transfer assets to higher value uses
• ease of entry and competition — consolidation rules and the non-neutrality of taxation of corporate debt
and equity could contribute to incumbency bias, particularly if new businesses are more likely to initially befinanced through equity• risk management — which can be hampered at the margin by state insurance taxes. The asymmetrictreatment of profits and losses could also work to diminish businesses’ risk appetite (though this is noteasily corrected).
In general terms, both tax rates and tax neutrality issues will be highly relevant to productivity. The marginalexcess burden (a measure of the economic distortion or efficiency loss caused by taxation) from a tax tends
to rise exponentially with the tax rate. Working towards greater neutrality of tax between businesses, savings
vehicles and labour vs. capital income should have positive impacts for tax efficiency and productivity.
The benefits of even small improvements in the efficiency of the tax and transfer system could be substantial
given Australian governments collect almost $600 billion in tax revenue (in 2020-21). Just a 0.1 percentage
point fall in the average excess burden of taxation would amount to a saving of about $600 million in lost
economic activity.
In addition, tax neutrality between corporate debt and equity has received increasing attention.
Notwithstanding Australia’s dividend imputation system, there is the potential for investment to bediscouraged when businesses finance it through equity (and thus need to make more than the normal
return). While a number of reforms have been canvassed to deal with this, one advantage of the Allowance
for Corporate Equity proposal is that it effectively taxes marginal investments (those making a normal rate of
return) at or near zero, thereby potentially encouraging new investment (Volume 3).
As governments (Australian and State and Territory) alter the tax system over the next decade, they shouldlook to systematically transition the system to be more supportive of productivity growth across the fivedomains outlined above (reform directive 20).

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Improving risk management and insurance
A new and under-appreciated policy theme is Australia’s heavily regulated and extensive system of public
and private risk protection.
This ‘system’ (though it is rarely recognised as such) consists of private insurance, mandatory contributory
schemes (workers compensation and compulsory third-party insurance) and the publicly funded social safety
net (which combines risk management, redistribution and in-kind services).
These elements have developed by increment and without holistic design.
This ad hoc ‘system’ of risk protection and insurance lacks coherence and arguably has become a potential
barrier to innovation and productivity growth on a range of fronts:• gaps in risk protection can reduce risk appetite (such as diminishing willingness to change career or starta business), which could reduce the dynamism of the economy• the tax and transfer system can create adverse work incentives, affecting labour supply• regulatory restrictions on private insurance can discourage new approaches to prevention, and more
efficient service design, thereby limiting innovation and more productive outcomes• publicly funded programs do not always give sufficient weight to insurance principles like maximising
long-term outcomes and cost containment.
Unlike the retirement savings system, which has a recognised architecture, the risk protection system inAustralia is not well understood. A generational review and reform process that holistically assesses thecomplex inter-linkages across Australia’s risk protection system could yield significant productivity gains
across many of the themes highlighted in this report (a more dynamic economy, more productive non-market
services and improved human capital).
Such a review, and ongoing reform process, should focus on:• the impact on individual entrepreneurship — Australia and New Zealand are outliers in following a ‘social
assistance’ approach to income replacement in the event of job loss (primarily via Jobseeker). Other OECD
countries have contributory unemployment insurance schemes, providing materially higher near term
‘replacement rates’ — cushioning the blow of job loss. It is possible (though hard to assess) that this could
diminish risk appetite for Australian households, with a cost to economic dynamism. Australia is unlikely toembrace a contributory scheme, but options could be explored involving income contingent loans and/or
modest expansion of income protection products through group life insurance obtained via superannuation.
• barriers to innovation and new service models — Private insurers are heavily restricted in the services
they can offer. Health insurers cannot fund out of hospital services for which a Medicare Benefit could be
paid. Life insurers cannot fund health interventions. But both are exposed to the cost of ill health (throughhospital benefits and income protection policies respectively). The burden of disease is shifting to chronic
conditions, which require management and prevention (hospitalisation being a costly last resort).
– Regulation and incentives stand in the way of health and life insurers delivering innovative solutions,while the Medicare-funded, fee for service primary health system locks in a time- and labour-intensive
service model for managing chronic disease.10

10 The PC’s case study, Innovations in Care for Chronic Health Conditions, highlighted that most innovative, low-cost

initiatives were succeeding on the ground despite, rather than as a result of, existing funding models. Innovators were felt
to be swimming against the tide.
30

An agenda to lift Australia’s productivity– Health insurers face the added complexity of a model of risk equalisation that prevents them from fully
realising the savings from their preventative efforts with members (part of the cost saving effectively
being redistributed to the broader pool of health insurers).
• poor incentives for mitigation and early intervention — Publicly funded programs do not always
embed an ‘insurance mindset’ (e.g. a strong discipline on reducing long-term costs and getting better
outcomes through early intervention)11. Some options have been tried — actuarial assessments oflong-term cost, the New Zealand investment approach, or social impact bonds in Australian states.
– In mental health, the overlap between life insurance and workers compensation can create confusion
and inefficiency. In some cases, it has meant early intervention options are lost while claims areprocessed (possibly contested) through one scheme or the other.
– In general insurance, there have long been calls for greater investment in upfront mitigation rather thandisaster relief after the event. The Government’s Disaster Ready Fund is a good example of a renewedemphasis on prevention.
The review could bring into play insurance concepts that tend to be misunderstood or de-emphasised inmany policy settings, like moral hazard, adverse selection, risk management and the respective roles ofpooled vs self-insurance options.
In the near term, some smaller steps could be taken to improve aspects of the system and unlock
productivity gains (outlined in reform directive 17).

Using regtech to improve technology diffusion and lower regulatory costs
Regulation underpins important social, environmental and safety outcomes, but comes with a compliance burden
on businesses and individuals and can sometimes be a barrier to investment and other economic activity.
It is important that policy makers continue to focus on sound regulatory principles, including rigorous andtransparent appraisal of new proposals and a strong focus on regulator capability and culture. Technology isalso opening up new opportunities to improve regulation and ease compliance costs through the use ofregulatory technology (regtech).
Regtech is the innovative use of technology to better achieve regulatory objectives. Regtech can lower theadministrative and compliance burden for businesses and government and improve the quality of regulation
design and implementation.
Governments can support regtech adoption by presenting new regulations in forms amenable to regtech
solutions; for example, by making legislation machine-readable (the New South Wales Government’s
Community Gaming Regulation 2020 is a recent example).
Moreover, governments can also work with software providers to find ways to encourage industry to design
regtech compliant solutions (reform directive 24). One example where this has happened is the Fair Work
Commission’s efforts to develop an application programming interface that enables software providers to
directly access data on wages and entitlements from its Modern Awards Pay Database.

11 The PC’s inquiry into the veterans support system, A Better Way to Support Veterans, showed that it was complex,

unresponsive and too inflexible to achieve genuine long-term outcomes for clients. Similar characteristics could beobserved in the disability sector prior to the National Disability Insurance Scheme.
315-year Productivity Inquiry: Advancing Prosperity Inquiry report

A better approach to location and mobility
The transformative effect of communications technology is evident in the dramatic rise of remote work since
the beginning of the COVID-19 pandemic. It is probable that levels of remote work will be permanently higher
than 2019 levels, with businesses experimenting with variations on hybrid (or fully remote) models for asegment of the workforce.
This could prompt some job switching as employees seek employers better matched to their preferences(and vice versa). While businesses and individuals will make their own assessments about the relative
productivity of working centrally or at home (at least some of the time) there is no strong policy case forgovernment to try and influence those decisions on economic grounds.
But the increase in remote work, along with the rise of e-commerce, telehealth and remote learning aresoftening the nexus between economic activity and location. Planning and zoning systems that haveentrenched clear distinctions between residential, retail and office uses — and between industrial and othercommercial uses — should be made more flexible. Online retail is blurring the distinction between the shop
and the warehouse, just as remote work blurs the distinction between the home and the office.
Planning systems based on detailed rules about what economic activity can occur where, should be reformed
to free up locational decisions. This would support competition and new investment (reform directive 18).

Planning and zoning reform to improve access and lower costs
While some progress has been made to improve planning and zoning across all jurisdictions, further
improvements should be prioritised.
Reforms to planning and zoning laws in Victoria in 2013 and 2018 are a good example of successful reformthat is broadly enabling to business: There are now a small number of commercial and industrial zone
categories; the zones are standardised and have a broad range of allowable uses; and many commercial
uses are as-of-right. The Queensland planning system also has a flexible model to bringing applications into
the assessment stream (rather than requiring costly and time-consuming rezoning processes).
These approaches can reduce business set-up costs and increase the availability of suitable sites forparticular activities (such as small-scale supermarkets and large format retailers).
In addition, planning and zoning reform should pursue administrative efficiencies, including by aligning plansat different levels of government; and addressing simpler applications outside of the assessment process.
Key reform areas relevant to competition include:• moving to fewer zones with broadly-stated allowable and as-of-right uses. There should be a small
number of commercial and industrial zones — with a wide range of allowable uses — which would provide
flexibility, certainty, and competition, and limit the need for significant spot rezonings that would otherwise
delay and/or make more costly business establishment. Prohibited uses should be kept to a minimum,with most uses ‘as-of-right’• standardising permissible land uses within zone types. Zone definitions should be as consistent as
possible across municipalities and embedded in state government instruments to provide clarity andcertainty as to allowable land uses
• creating defined and efficient processes for rezoning applications. To the extent that rezoning orplanning scheme amendments are required to progress a development proposal, states should ensure
there is a transparent process for applicants to pursue, with expected timeframes, criteria and appeal
rights (reform directive 18).
Governments can also ease other restrictions on the location of specific businesses.

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An agenda to lift Australia’s productivity

Regulations on location and ownership of Australia’s pharmacies have reduced competition in local markets— there are now fewer pharmacies per head of population than when the regulations were introduced — andhave facilitated the establishment of local monopolies — four pharmacy operators control 73% of the market
share (through franchising and the like). Australian governments should follow the lead of the United
Kingdom and the United States where pharmacy colocation — for example, pharmacies located insupermarkets — is allowed.
Other sectors where the Government has a large regulatory footprint should similarly and subsequently be
examined to remove those impediments to competitive pressures that are not clearly supporting a broadersocial or environmental policy objective (reform directive 19).

Using efficient pricing to fund transport infrastructure and ease congestion
As location becomes more contestable, there is a strong case to ‘price’ mobility more accurately.
Reforming the pricing of road use and mass transit would bring potentially significant productivity benefits.
The motor car, freeway and electric train were the large-scale technological innovations in 20th century
mobility — solutions based in manufacturing and engineering. Digitally-enabled pricing and service design
are the technological opportunities of today.
Digital solutions and improved data availability have made it possible to move beyond average prices like thefuel excise, or simple fare structures based on paper tickets or first-generation card technology. It is
becoming possible to set prices closer to social marginal cost, opening up incentives for new mobility
solutions to emerge.
Road congestion in Australian cities imposed costs of about $24 billion in 2018-19. While road users are
subject to an array of charges, few are well targeted at relieving congestion (i.e. rationing demand for scarcetransport infrastructure).
Investment in and planning for new roads, and maintenance of existing ones is slower when compared withother modes of transport, and with disruptive technologies such as electric vehicles growing in popularity —resulting in a decline in the relevance of fuel-based charges — there is a greater need (as well as anopportunity) to get road-pricing right.
To achieve more efficient road user pricing, Australia governments could move towards a pricing framework that
better reflects the costs imposed on the road system by users, recognising too that electrification of the vehicle
fleet will undermine the revenue collected through fuel excise taxes. This would take time and many small steps.
Eventually, the pricing framework would ideally have two components: a charge based on distance travelled anda higher congestion price for certain locations and times. This would lead to more efficient use of existing
infrastructure (including for maintaining and repairing existing roads), and demand-based forecasts based on
prices that reflect efficient use would also help guide efficient levels of investment in new infrastructure.
Public transport fare setting in most jurisdictions similarly suffers from policy inertia. Most jurisdictions use simple
and ad hoc approaches to setting fares and subsidies that do not systematically address equity or efficiency
goals. A large downside risk associated with the current pricing model is that public transport services raise very
little revenue from fares and rely on substantial public subsidy. Those subsidies must be raised through the tax
system (which comes with an efficiency cost) and their overall impact is not always progressive, as many highincome commuters are subsidised. Service quality is one of the biggest drivers of value, and hence usage, forcustomers, but it can suffer when public subsidies are primarily geared toward lower fares.
Independent fare regulators can help overcome these issues. A superior approach to pricing developed by
the Independent Pricing and Regulatory Tribunal has been operational in New South Wales for some years,

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while Infrastructure Victoria has undertaken considerable research on pricing reforms, though this is not yet
reflected in policy.
State and territory governments should adopt better practice public transport pricing, including by drawing on
the existing experience and policy work undertaken in their own, or other jurisdictions. This could include
implementing in Victoria, Infrastructure Victoria’s reform directives on pricing, and more widespread adoptionof the NSW pricing approach developed by the Independent Pricing and Regulatory Tribunal. States andterritories without independent bodies to make jurisdiction-specific recommendations could also improve faresetting through other channels, such as publishing pricing strategies and rationales for decisions, andannually increasing fares in line with inflation in public transport costs (reform directive 18).

Lifting productivity in the non-market sector
Overcome barriers in order to increase innovation and diffusion in government-funded
services

Embrace technology and remove overly restrictive regulation to speed up productivity inlabour-intensive non-market services
Improve Australia’s healthcare system to improve well-being, engagement and labour
market outcomesThe ‘non-market’ moniker is something of a misnomer. It is not the case that non-market services are neverdelivered in a market. Rather as discussed above, the key point is that they are typically provided free ofcharge, or at prices that are well below cost.
Some non-market services are funded and directly delivered by government entities. Others are part-fundedby government but delivered by private businesses or not-for-profits under a broad range of funding models
and regulatory settings.
The rapidly expanding non-market sector, where productivity growth is slow — which will increasingly weighon Australia’s overall productivity growth rate — presents a challenge for Governments. They need toencourage innovation and diffusion of new and better ways of doing things in the services they provide or
subsidise, with the aim of producing better quality and more accessible services at lower costs. This task will
not be straightforward.
The systems within which non-market services are delivered are often highly complex. This complexity, andthe heterogeneity across the non-market sector, means productivity policy in the non-market sector iscontext-dependent, painstaking, and incremental.
The complexity of incentives has meant that while some past attempts to inject competition and market
disciplines into government services have been effective, other attempts have failed. Market design is
critical, but hard. Seemingly small weaknesses in the incentive structure can have large adverse anddistorting effects on outcomes.
In principle, productivity in the non-market sector comes from the same basic drivers that exist in other partsof the economy: using labour more efficiently and complementing it with technology and innovating models
of service delivery.
What differs is that the outcome being sought is public value, or a social purpose, rather than measurable
increases in output.

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An agenda to lift Australia’s productivity

And the structure of service delivery systems makes the path to productivity growth different. Diffusion
channels like business entry and exit are less prevalent, price competition is muted, and there is less ability
to expand market share through innovation. Many labour-intensive government services are hard toautomate. The respective roles of workers with different qualification levels can be highly contested.
Where there is a separation between the party paying for the service (government or an insurer) and theservice recipient, incentives for cost containment and quality improvement can be lessened.
Quality can be very hard to measure. This often results in government stepping in to regulate aspects of theservices they fund, sometimes to mandate inputs as a proxy for service quality.
None of these issues is easily solved. Reform can focus in three main areas.
The first is to keep refining and adjusting funding models that encourage the delivery of more effective(hence higher productivity) services — addressing parallel issues such as scope of practice constraints will
also be necessary.
The second is to actively create and support an eco-system of best practice innovation and diffusion in
respect of key non-market services — such as the more effective management of chronic disease reducing
hospital visits.
The third is to seek out opportunities for labour-saving technology in the most traditionally labour-intensive
service sub-sectors, backed by more outcomes-based quality regulation — such as use of clinician
supported online mental healthcare services.
A particular area of focus in this report, where governments and the community could benefit from theapplication of this three-tiered approach, is in the health and care sectors. Every year, significant amounts of
taxpayer funds are used to subsidise medical procedures where the evidence base shows there is limited
efficacy for improving patient outcomes, while the diffusion of demonstrated innovations in providing bettercare is too slow.

More flexibility in allocating government funding
Productivity in the non-market sector can be supported through more flexible approaches, or blended,funding models.
A common problem with existing models is that they tend to encourage quantity solutions — or activity —rather than quality. For example, fee for service models can reward inputs rather than outcomes. Capitation
models can create incentives to reduce service levels. Quality and outcomes are hard to measure and hence
reward. Australia has the added complication of Commonwealth-State overlap, where different funding
models interact poorly or undermine system coherence (such as social housing and Commonwealth Rent
Assistance) (reform directive 23).
Because there is no such thing as a perfect funding model, the status quo tends to persist. Conscious effort
is required to adapt or reform entrenched funding or service delivery models.
Health is an example of where funding models have rewarded activity — through explicit activity-based
funding in the acute hospital system and fee for service funding in the primary care system. This can create
barriers to productivity growth because it locks in a particular amount of labour input (e.g. funding a
30 minute one-on-one consultation).
In some cases, the solution will be more blended models, combining elements of fee for service withcapitation (per person) amounts. This has promise in primary care for the treatment of chronic conditions andcould allow for some flexibility about labour input (the total and the split between different occupationalgroups) and the use of technology.
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In other cases, the use of flexible funding pools to substitute for a portion of activity-based funding canunlock innovation and alternative service models.
Often in the non-market sector, productivity growth (similar outcomes for less input) is advanced by finding
and funding lower cost settings to provide a service, such as community-based health as a substitute for
acute care, or a range of alternatives to prison incarceration as a means to achieve community safety.
The rise of impact investing, ‘payment by results’, and social impact bonds are providing alternatives to
traditional funding and delivery methods. These can sharpen incentives to produce higher quality outcomes,
encourage co-ordination between different service elements (notoriously hard in government) and bycreating a growing knowledge base about ‘what works’. But specifying the outcomes, and the baseline
against which to reward them, is complex.
There are some areas where governments can move toward ‘client-centred’ funding approaches in humanservices, so long as incentives and safeguards for cost containment and quality are strong. Under such models,clients are given control of funds to purchase services from providers of their choice, promoting innovation anddiffusion, and ensuring that clients get the services that best meet their specific requirements. Providers
compete to attract clients, promoting the development and uptake of new innovations (reform directive 23).
In other cases, the direction of reform is to move towards more relational contracting. In many instances,increasing the minimum length of contracts to 5–7 years for community organisations delivering health andhuman services would enable greater development of expertise and provide the certainty and stability
needed to invest in innovation. And better use of alliance contracting or collaborative contracting for major
public infrastructure projects would mean contractors with greater technical expertise and knowledge would
be involved earlier in the planning and scoping stages of a project, increasing the opportunity for innovative
approaches to project delivery (reform directive 22).
These approaches reflect inherent uncertainty: it is hard to specify all relevant future contingencies in an
up-front funding contract. A shared approach is a more efficient way to deal with unexpected events.
The Closing the Gap Agreement explicitly prioritises service delivery through the Aboriginalcommunity-controlled sector, which also requires a shift in thinking away from transactional contracting forspecified services and towards long-term investment, a strong sense of partnership and a centring of
Aboriginal and Torres Strait Islander people in service design and delivery.

Institutions to support best practice
A key issue in the non-market sector is that the ‘system’ for innovation and diffusion of ideas is often patchy
and incomplete. One key element is the availability and evaluation of an up-to-date evidence base.
Governments already fund many organisations to evaluate publicly-funded services and promote diffusion ofbest practice — including the Australian Commission on Safety and Quality in Health Care, the Australian
Education Research Organisation, CSIRO and the Australian National Audit Office. But in many cases theirfunctions and roles are too limited. Governments should expand or strengthen the roles of these existing
diffusion bodies with the aim of disseminating best practice, including the elimination of practices no longer
underpinned by adequate evidence (reform directive 23).
Governments can also improve benchmarking of government service delivery, both between jurisdictions
and between service providers. There are currently a number of benchmarking initiatives, including the
Productivity Commission’s Report on Government Services, MySchool, MyHospitals, the Australian Atlas of
Healthcare Variations and a number of state and territory government initiatives.
The continued growth and availability of data will create new possibilities for benchmarking, to provide richer
information about how far service providers are from the best performers in their sector (reform directive 24).
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An agenda to lift Australia’s productivity

Addressing productivity in labour-intensive non-market services
In many parts of the ‘care sector’, cost and quality improvements have come from replacing, or augmenting,labour with physical capital (e.g. hospital clerks replaced by computers) or building the human capital of theworkforce (e.g. improvements in the quality of medical care in the past century as doctors have accumulated
more clinical knowledge).
Some parts of the non-market sector, including disability and aged care, are highly labour intensive, involving
personalised services. It can be difficult to achieve big gains in labour productivity in these parts of the economy.
Nonetheless, it is important to explore and maximise the scope for the use of technology where possible.
Emerging technologies show some promise for both improving the quality of services provided, and reducing
their costs. Machines may be able to automatically perform manual tasks — like lifting or cleaning patients —currently performed by carers. Likewise, using diagnostic algorithms to quickly triage clients that will require
more care could mean staff can be allocated to where their need is highest (i.e. operating in line with theirscope of practice).
Even now there are proven technologies that could reduce the amount of labour required to perform certain
service tasks (some even relatively high skilled). The WA primary Health Alliance commissioned Practitioner
Online Referral Treatment Service (PORTS) has provided several years of psychological assessment,
treatment, and consultation services across the state to adults referred by their GPs at a fraction of the costof the standard MBS-rebated therapy.
There are some potential barriers to the adoption of labour-saving technology.
There are the general barriers to government and private sector diffusion (above) and second, there arebarriers governments have erected specifically — and seemingly without fully understanding the potentiallylarge impact of unintended outcomes — in these occupations. These include innovation-inhibiting
restrictions, such as minimum staff-to-client ratios that discourage consideration (let alone adoption) of
labour-saving technology in the care workforce, and poorly designed activity-based funding models, which
reward outputs rather than outcomes in hospitals (finding 5.11, volume 5).
These types of interventions may often exist for good reason. In government-funded human services, clients,
including those who are particularly vulnerable, need assistance choosing a service or service provider
where information about the quality of those providers is difficult to find. And generally, consumers havefewer incentives to properly hold providers to account as they do not face the full cost of their service.
However, the benefits of regulating for quality assurance need to be balanced against the costs fromdampening incentives to consider and adopt productivity-enhancing innovation.
Shifting where possible towards outcomes-based quality regulations would give service providers more
flexibility to meet their obligations in the most effective and efficient way possible.

Health reform should focus on broad strategies executed across the country
In Shifting the Dial, the Commission homed in on the healthcare system as a key component of the policy
agenda.
This reflects both the need for productivity growth within the health sector, as a large and growing share of
the economy and workforce, and the impact that good health outcomes can have on productivity,
participation and broader life outcomes.
In that report, the Commission noted the rigidities of existing healthcare service models: the lack ofintegration between parts of the system, inadequate use of data, and poor diffusion of best practice. It used37

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

the example of the ‘waiting room’ to symbolise the lack of innovation and patient focus in the system, notingthat waiting times in doctors’ offices are likely to impose costs on Australians of approximately one billion
dollars annually.
While there are the systemic problems that limit the quality and efficiency of the healthcare system, theoverarching goal should be changes to encourage patient-centred and integrated care. There are threeconcrete reform strategies that reflect the broad problems above and the policy responses most likely to
alleviate them:
Funding arrangements that align with high value care
Scaling up long-term co-operative funding mechanisms that align the incentives of primary and hospitalproviders would help avoid costly hospital admissions and support integrated care. As noted above,
innovative funding pools have helped spur innovation in health care delivery. Capitation (or blended) models
and other mechanisms supported by the Independent Hospital and Aged Care Pricing Authority hold promise
in removing some barriers to innovation and productivity growth (reform directive 23).
There may also be scope to expand the role of private health insurance and potentially life insurance canalso unlock new reimbursement models to target preventative approaches.
Encouraging innovation, experiments and diffusion of evidence-based healthcare andadministration, while eliminating waste
For example, annual reviews of selected items on the Medicare Benefits Schedule, and updating theschedule so that only treatments that reflect medical best practice are funded would represent a concrete
step towards a more evidence based, efficient and patient centred system (reform directive 23). Clinicalvariation can reflect differences in practitioners, rather than differences in patients, and can contribute to
substantial waste in the system.
The adoption of new technologies and data sharing arrangements that improve coordination in the system
As an illustration, the Mental Health inquiry, released in 2020, and the Innovations in Care for Chronic Health
Conditions study, released in 2021, showed the benefits to patients from service models based even on
relatively simple digital channels, data analytics and data linkages. Transforming My Health Record into acomprehensive system for sharing and using health data across all parts of the health system could
significantly improve service quality for patients (reform directive 15).
These three areas for policy focus have long been aired (and indeed were canvassed in Shifting the Dial — thepredecessor 5 yearly productivity inquiry) and are best prosecuted through a system-wide co-operative reform
across all jurisdictions. The Australian Government’s Primary Health Care 10 Year Plan and parts of the
National Health Reform Agreement (signed by all Australian governments) reflect a degree of momentum.

Securing net-zero at least cost
Chart the least-cost path to net zero to minimise the drag on productivity from our
mitigation efforts
Adapt to the changing climate by helping individuals, households and businesses makeinformed adaptation decisions
Improve the reliability of electricity markets to best respond to intermittence challenges
associated with increasing uptake of renewables

38An agenda to lift Australia’s productivity

Climate change looms large over Australia’s productivity growth.
To minimise the economic costs of decarbonisation and meet Australia’s commitment to a 2050 Net Zero
Emissions Target it will be important to pursue least-cost mitigation and adaptation policies across all levelsof government to the greatest extent possible.

Charting the least-cost path to net zero
Investment in renewable generation is projected to rapidly decarbonise our electricity system over the next
decade, which will in turn drive the decarbonisation of transport and some parts of heavy industry and heavytransport. Remaining ‘harder-to-abate’ sectors, such as broadacre beef production in agriculture, might be offset
through the uptake of carbon sequestration measures like reforestation or carbon capture and storage. Ongoing
technological development and shifting consumer preferences (e.g. in the form of artificial meat products, where
demand is rapidly increasing) could also reduce demand for, and emissions from, these sectors.
While technological developments are mainly driven by international policy settings, domestic policy settings(including trade and foreign investment policies) are important in driving the application of these technologies
by individuals, households and businesses in Australia. Domestic policy settings that produce enduring andconsistent abatement incentives will be crucial.
To date, Australian governments have sometimes relied on mitigation measures that impose economic costs
much higher than would be delivered by an explicit economy-wide carbon price. Apart from this, Australia’s
mitigation measures may expose Australian exporters to additional costs in the form of carbon border tariffs(i.e. where trading partners do not recognise mitigation measures other than explicit carbon prices).
Future abatement policy should apply as broadly as possible to encourage efficient, technology-neutral,
least-cost abatement, including by providing a more certain capital investment environment for Australia’s
carbon emitters.
The foundational elements of such a mechanism already exist. Recalibrating several existing schemes, whileremoving those that are unnecessarily costly, would create a sustainable climate policy architecture forAustralia — that is, one that provides greater certainty, clarity, and enduring support for efficient abatement
decisions over the decades ahead.
To this end, the Safeguard Mechanism (SM) can be the basis for an economy-wide mechanism for achieving
national abatement targets (reform directive 26).
At present, the SM seeks to limit greenhouse gas emissions by targeting Australia’s largest industrial
emitters. It does this by assigning emissions budgets (baselines) to facilities that produce more than
100 000 tonnes of CO2 equivalent (CO2-e) emissions. Emissions exceeding these budgets must be offset
through the purchase of Australian Carbon Credit Units (ACCUs) created through various emissions
reduction activities elsewhere in the economy.
For the SM to become an effective broad abatement mechanism, a package of changes will be required tostrengthen its integrity and expand its scope.
• Baselines will need to be reset in terms of absolute emissions, not emissions intensity (emissions per unitof output). The existing emissions intensity targets allow overall emissions to increase in line withproduction, which could jeopardise Australia’s emissions targets. Absolute emissions baselines avoid thisoutcome.
• With absolute emissions baselines in place, emissions reductions below these absolute emissions
baselines should be tradeable with other facilities covered by the SM. This would increase the pool of39

5-year Productivity Inquiry: Advancing Prosperity Inquiry reportcommercially viable abatement opportunities and allows the transfer of economy-wide abatement burdens
to the least-cost abatement options within the SM, reducing economy-wide abatement costs.
• Importantly, the SM currently only covers 27% of Australia’s greenhouse gas emissions. It should be
expanded (reform directive 26).
Under existing arrangements, the electricity sector — which accounts for more than 30% of Australia’s
CO2-e emissions — is covered at a sectoral level but not at the facility level.
Apart from some large facilities such as airlines, the transport sector — which is responsible for almost 20%of emissions — is effectively exempt from any limits because most emissions come from hundreds ofthousands of cars, trucks and buses that individually emit well below the threshold limit.
Expanding the SM to include the electricity sector at the facility level would increase the facility-level
coverage of the SM to more than 55% of Australia’s emissions. Incorporating the transport sector, by
attributing vehicle emissions to liquid fuel wholesalers, would increase the coverage of the SM to about 70%
of total Australian emissions. Extending the SM to facilities emitting more than 25 000 tonnes of CO2-e
would increase coverage by another 3% to about three quarters of total emissions, creating a nearcomprehensive, economy-wide abatement mechanism (figure 1.12).
Figure 1.12 – The Safeguard Mechanism should cover transport and electricity
Australia’s projected marginal cost of abatement curve, 2030
400

Cost of Abatement (A$/tCO2-e)

300
200

Electricity

Land Usea

Agriculture

Industrial

1000Fugitiveb-100

Direct Combustion

-200
-300

Waste

Transport

-400
-500
-600

0

25

50

75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500
Abatement Volume (MtCO2-e)a. ‘Land use’ includes land use change and forestry. b. Fugitive emissions are emissions associated with production ofnatural gas, oil and coal.

The degree to which the SM credibly and efficiently contributes to Australia’s emissions reduction
commitments will partly depend on the integrity of the offsets recognised by the scheme. Accordingly,
Australian governments should take steps to ensure the integrity of ACCU offsets recognised by the
Safeguard Mechanism by tightening standards to ensure the additionality, permanence, and transparency of
ACCU generating projects (reform directive 27).
With an expanded SM in place, the public policy case for additional sectoral interventions becomes much
weaker. Governments should ensure that any emissions abatement policies that are not genuinely
complementary to the SM — that is, they neither efficiently address non-price barriers to abatement nor deliver40

An agenda to lift Australia’s productivity

broader noncarbon abatement social benefits — are phased out (reform directive 28). For example, theongoing need for additional policy support for renewable energy generation is likely not required, and similarly,
the already questionable policy case for Australian Government tax concessions for electric vehicles — whichhave a high cost-per-tonne of abatement — would become even more so. Extant and prospective emissions
policies should have their implicit carbon prices independently estimated and made public.

Adapting to the changing climate
Most adaptation-related decisions will be made by individuals, households, and businesses. Accordingly,
adaptation policy to promote productivity should focus on three main tasks: helping individuals, households
and businesses make informed adaptation decisions; avoiding policy settings that inadvertently andinefficiently distort private adaptation decisions; and avoiding policy decisions that lock in higher adaptation
costs in the future (reform directive 25).
To these ends, governments should implement a mandatory climate risk disclosure system for residential
and commercial property sales to help buyers understand the climate-related risks they face. Governments
should avoid expansion of distortionary insurance sector interventions and set a medium-term time frame forthe phase out of those that exist already. In addition, decisions about the location of new greenfielddevelopments, and the reconstruction of population centres impacted by natural disasters should be
subjected to rigorous cost-benefit analysis that draws on existing climate projections and considers the broad
range of social, environmental, and economic costs and benefits of available options.

Improving the reliability of electricity markets
Intermittence associated with growing renewable energy uptake (which arises from variation in theavailability of solar and wind generated electricity over the course of the day) poses reliability questions forAustralia’s electricity grid. Australian, State and Territory governments have recently announced plans to
implement a capacity investment scheme to effectively pay suppliers of dispatchable electricity to make that
supply available during periods of grid instability, helping to increase the likelihood that adequate supplies
will be available when needed.
The implementation of the scheme would mark a move away from Australia’s current approach to grid stability,
which largely relies on movements in wholesale electricity prices to bring supply and demand into alignment.
To support productivity growth, the capacity investment scheme should be designed to respond tointermittence at least cost. Promoting a more technology-neutral approach, by allowing for both supply anddemand side participation in the scheme, from both large entities and smaller entities (aggregated andcoordinated through ‘virtual power plant’ platforms), would be an important step in this direction. The scheme
should be reassessed in 5 years (via the inclusion of a sunset clause) to ensure the ongoing costs tobusinesses and households of maintaining the scheme are justified (reform directive 29).

1.4

The shared benefits of a productivity agenda

Across nations, there is a strong correlation between average incomes, life expectancy and life satisfaction,and reductions in absolute levels of poverty: not just because high incomes can fund better services andbenefits; but also because they share a common proponent — a system that constantly promotes new ways
to get more (and better) from less, to improve everyday life.
But what about the relative gains? Are the benefits evenly shared across the community?

41

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

These distributional questions cannot be dismissed. Past economic reforms — particularly where entire
industries have been restructured — have often delivered benefits to many, but with losses concentrated inparticular regions or demographic groups. This is more problematic when the losses hit those with alreadylow incomes, wealth or educational qualifications.
Even at a smaller scale, economic change creates losses as well as gains. If consumers vote with their feet and aless productive business loses market share to a more productive one; or if it exits the industry altogether,individuals can suffer a loss of income and the jolt of forced transition, even though many consumers are better
off. Governments play a key role supporting such adjustments and protecting people in need of help.
To this end, this report notes the role of government as an insurer against the risks people face throughout
their lives through the provision of in-kind services like health and disability care, and transfer payments.
Much of this insurance works well, but there are gaps and complex interactions with other privately-managed
forms of insurance — with potentially adverse economic and social outcomes. Having government think
more explicitly with an insurance mindset would be a significant, generational reform journey for Australia.
This report makes some recommendations to start that reform process.
When overall risk protection is robust, policy makers can have more confidence about the disruptions thatcan come with policy change, or in a dynamic economy in general.

Potential distributional effects of proposed reform directions
A qualitative assessment, and the Commission’s own modelling, suggests that the package ofrecommendations detailed here would increase opportunity and improve outcomes for some key
disadvantaged groups.12
Many of the reform directions are directly focused on reducing barriers, improving incentives and spreading thebenefits of productivity growth more broadly. Driving innovation and diffusion in the non-market sector is aimed
at improving services — typically delivered to the general community or to particular groups in need of support.
Even where there is scope for labour-saving technology in government-funded services, this is likely to be in
the context of substantial growth in overall employment in areas like the caring sector. Some cost reduction
would make services more affordable to government, while quality improvement is of benefit to service users.
Improving productivity in the school system is one of the most effective ways to boost equality of opportunity
and improve economic and social mobility within and between generations. Thus, the proposed school
reforms outlined in this report are likely to be progressive in their overall impact. The spread of technology inschools and evidence-based course materials to teachers can not only lift teaching quality, but make it lessunequal. This has potential to lift outcomes among students at risk of falling behind, and those who sufferfrom variable teaching and school quality.
Tertiary education reforms primarily expand access to income contingent loans for a broader range of VET
students, and additional university places under a reformed demand-driven system. Experience under the

12 The Commission used a purpose-built model to illustrate the whole-of-economy effects of stylised representations forsome proposed reforms. The model provides insights on:• how productivity improvements can flow through the economy’s structure, and what the changes are in underlying
economic variables that are driving overall movements in aggregate outputs such as GDP, gross national income,prices, wages and use of labour measures relating to the impact of reforms on consumer wellbeing (in monetary
terms, for example, equivalent variation) and inequality (for example, the Gini coefficient)• the differential impacts of reforms across various groups in the economy, at both the individual level (by age,education and gender groups) and the business level (by industry).
42

An agenda to lift Australia’s productivity

demand driven funding arrangements in place between 2012 and 2018 suggests that these reforms would
disproportionately benefit lower income students and other equity groups, whose share of the student
population experienced a major expansion.
To make that package fiscally neutral, it is recommended that some students make a greater contribution to
the cost of their study, through the income contingent loan system. This would effectively bring the student
contribution more into line with the private benefits that flow to graduates over their working lives — paid at atime when their future income exceeds the repayment threshold.
Lifelong learning needs careful design. Those most likely to pursue it tend to have a strong learning
foundation — including those who have completed higher qualifications. That does not negate the case for
fostering a culture of lifelong learning. There are productivity gains and spillover benefits from encouraging
up-skilling and re-skilling throughout working lives. But particular focus could be given to broadening theuptake of ongoing training, including to those disconnected from the workforce or at risk of being so.
The proposed migration reforms aim to focus the program more on higher income migrants, to maximise thespillover and productivity benefits. Moving away from the inefficiency of skilled occupation lists could meanthat some domestic workers who earn more than the proposed income threshold could face morecompetition. Local workers below the threshold could face less competition. The impact on the wage
distribution is likely small, but more likely to reduce it.
Workplace relations reforms seek to improve the scope for flexibility within the architecture of regulated
protections. As Volume 2 notes, productivity growth is not about employees working longer hours, or having
their pay reduced. In fact, past productivity growth has resulted in higher wages and fewer hours worked per
capita. Low aggregate productivity growth makes the 4-day working week less feasible and therefore lesslikely. There could be significant gains to workers through better award compliance due to regtech solutions(and simpler rules).
A fit for purpose regulatory approach to platform work can deliver important protections in respect of safety,
insurance and dispute resolution. At the same time, it can preserve the choice and flexibility that workers andconsumers have gained from this innovation, benefiting a cross-section of the community.
Refocusing innovation policy on diffusion — the 98% — is an effort to more fully democratise innovation. The
policy measures recommended here are a suite of small changes, all aimed at helping ideas to spread more
efficiently across the economy. But the successful uptake of new ideas — including digital technology or the
more sophisticated use of data — will inevitably be patchy. For example, Productivity Commission research
into cloud computing suggests that some businesses will use technology to great effect, while others will failto adopt, and still others will adopt but fail to achieve much benefit.
Governments can improve the process of efficient adoption by working with business networks and providing
benchmarking data. But as long as there is nothing systematic about which businesses succeed withtechnology and which do not, the distributional effects should be seen as a necessary reality underpinning a
dynamic economy. Ensuring there are no undue impediments to labour (and capital) mobility and that there
is a robust safety net in place, are the best solutions.
High quality and efficiently provided regional and remote digital infrastructure helps overcome one source ofsystematic differential performance among businesses. It will also reduce geographic variation in the qualityof delivery of telecommunications services for consumers.
Some recommendations involve changes to pricing, such as an evolutionary shift towards road user
charging and ongoing reform of the pricing of public transport.

43

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

A key consideration is that road use is currently ‘priced’ via a general fuel excise charged per litre of fuel.
The fact that electric vehicles pay no excise raises distributional issues.
The Commission’s past work on public transport pricing highlights similar distributional complexities.
Commuters on major city train networks traveling into the central business district tend to have above
average incomes. They benefit from substantial public subsidies not enjoyed by those (including low-income
households) with less public transport access. While a high public subsidies is inevitable in most public
transport systems, there is considerable scope to design fares to achieve better efficiency and equity.
Perhaps the most challenging distributional issue concerns the climate transition. The distributional costs
and benefits of both mitigation and adaptation span generations. Achieving the successful decarbonisation of
the Australian economy will involve a structural change for affected industries and regions. The
recommendations in this report focus on using the safeguard mechanism to foster a more orderly, lower costand predictable transition. Focusing on achieving net-zero at least cost, by promoting higher productivity
growth than otherwise, will also enhance the capacity to provide adjustment assistance, including to lessen
inequitable distributional impacts.
Overall, while thoughtful, and often gradual, implementation is needed, there is no strong case on equity
grounds against pro-productivity reforms of the type outlined in this report. Quite the contrary. A key
message of this report is that we can broaden our thinking about productivity — both its effects (quality,
novelty, things not measured by GDP) and where it can apply (services and the government sector).
The impact of productivity growth — properly and broadly understood — is progress in multiple domains,multiple facets of life and with benefits spreading across the community.

44Roadmap

2.

Roadmap

The Commission’s policy agenda includes 71 recommendations that collectively would enable productivity
growth across the Australian economy. These recommendations are packaged together into 29 reform
directives. Generally, the reform directives capture what governments should do; the recommendations tellthem how to do it. These reform directives are the enablers of productivity growth that fit under the fivethemes outlined in section 1.3.
To help direct government resources toward implementation, the Commission has developed a roadmap toreflect a possible prioritisation. The prioritised reform directives are laid out in section 2.2. The roadmap also
contains a collection of implementation plans (section 2.3). These plans provide more detail on how
governments would go about implementing the highest priority reform directives.

2.1

The prioritisation framework

Prioritisation of reform directives is not an exact science. To keep things simple, they are prioritised using
two criteria.
The first criterion is expected productivity impact.
Reform directives were sorted into two broad groups according to their expected impact on productivity:
higher impact and lower impact. In grouping reforms, factors considered included:• the number of affected parties (e.g. people, employees and businesses)• the costs and benefits for those parties• whether the reform results in a one-off ‘step-change’ to productivity or has an on-going effect on
productivity growth rates• the extent of additionality from the reform (that is, the difference between what we would expect to happen
with and without implementing the reform).
Where appropriate, prioritisation drew on modelling presented in volume 9. This was only feasible for a subset ofreform directives. For others, partial assessment of costs and benefits were estimated and/or qualitative
assessments were made drawing on information from inquiry participants and other Commission research.
Generally, reform directives that affect many parties, have relatively large additional effects, or result in an
increase in the productivity growth rate were deemed higher impact. Reform directives that affected lessparties (unless the effects were particularly concentrated on those parties), had little additionality, or resulted
in a smaller step-change were deemed lower impact.
The second criterion is complexity.
Reform directives were sorted into two broad groups reflecting their expected complexity to implement:complex and simple. Again, a range of factors were used to assess reform directives, including:45

5-year Productivity Inquiry: Advancing Prosperity Inquiry report• whether the reform requires coordination between government agencies (whether between or acrosslevels of government)• whether the reform requires more involved processes (like changes to legislation as opposed to regulatorychanges)• uncertainty — a reform whose outcomes we are less confident in, is more complex.13
Generally, reform directives that require greater coordination, require more involved processes, and havehigher degrees of uncertainty are deemed complex. Reform directives that require limited coordination, requireless involved processes (e.g. just regulatory change) and have more certain outcomes were deemed simple.
The goal of prioritisation is to help direct public resources toward the highest value measures first. Using theabove criteria, the reforms were divided into three different priority levels:
Category A: These reforms are higher impact and either simple or complex. While some of theserecommendations are more complex than others, their higher impact means they should nonetheless all be
top priorities in the pursuit of productivity growth. If government were to implement only one group ofpolicies, this group should be their choice.
Category B: These reforms have a lower productivity impact but are simple. While individually lower impact
than Category A recommendations, they would have a significant cumulative effect if implemented. And
because they are simple, governments will face relatively few hurdles in their implementation.
Category C: These reforms are more complex to implement and their productivity impact could varydepending on the scale at which they are implemented. They include reform directives such as a more
efficient tax system or long-term reform of Australia’s insurance arrangements — both of which could involve
small, short-term steps and/or more far-reaching, long-term change. This puts them in a distinct category.
Figure 2.1 provides a visual representation of the framework.
Figure 2.1 – Prioritisation framework
SimpleCategory

B
Category

CategoryA

C

Complex

Lower impact

Higher impact

13 Uncertainty may reflect the state of existing evidence, the potential for unintended side-effects, or dependence onother things happening first (like technological change).

46

Roadmap

2.2

The prioritised reforms

Table 2.1 contains the prioritised reform directives. Reform directives are organised under the five key
enablers of productivity growth in the policy agenda.

Timing the policy agenda
Prioritisation suggests that, given limited time and resources, governments should focus on implementing
Category A reform directives, then B. But they should also consider initial steps towards implementation of
Category C reforms.
In almost all cases Governments could make some progress implementing all of the reforms so that the potential
productivity benefits could be realised as quickly as possible. Some reform directives, and their associatedrecommendations, would take longer than others to implement due to differing degrees of complexity.

Opportunities to coordinate implementation across governments
Reflecting the very broad nature of the reform directives in the outlined policy agenda, action by all
Australian governments will be needed to position Australia for future productivity growth. Some of thesereforms will require coordination across governments, others can be implemented unilaterally. Examples areprovided below.
Australian Government reforms
The Australian Government can implement some reforms by itself. For example, elevating the Safeguard
Mechanism to be Australia’s primary emissions abatement mechanism would promote productivity and be
progressively achieved with little delay. Charging the Office of Supply Chain Resilience to assess the
economy-wide net benefits of all calls for assistance in supply chains, with transparent reporting of any
interventions, could similarly be implemented promptly by the Australian Government for immediate benefits. The
use of government-held data to help businesses benchmark their performance and provide insights that promote
diffusion of best practice is an approach already adopted by some Australian Government agencies. It could be
extended more broadly for the benefit of both the relevant businesses and the decision-making capacity of thestates and territories in which they are located. Reforms to migration policy is entirely an Australian Government
responsibility, though consultation with state and territory governments would be an important element.
State and territory government reforms
Other reforms are in policy areas where the states and territories have primary responsibility for program
delivery or funding. These include: revision of planning regulations to ensure residential, commercial andindustrial zoning is not unduly restrictive, various state taxes, public transport pricing, and trialing innovative
approaches to schooling.
In these instances, jurisdictions should consider a staged approach to implementation that reflects theirstarting points for reforms and priorities within their jurisdiction. For example, some states have moredeveloped planning and zoning reforms, have already commenced the shift away from stamp duty on thesale of dwellings, and have better processes for public transport pricing. All jurisdictions should share thelessons from their reforms.
Reforms for multiple levels of government
Actions by multiple levels of government will sometimes be needed for some reforms, or at least to yield alltheir benefits. In some instances, a nationally negotiated approach to implementation would lead to the most47

5-year Productivity Inquiry: Advancing Prosperity Inquiry reportbeneficial outcome for some state- and territory-based reforms. For example, we have recommended thatteaching resources be developed centrally to support schools in the implementation of the national curriculum.
Similarly, the Commission has recommended further progression in the sharing of government-held data.
Some of this data is held by the Australian Government and expanding access to state and territory
governments would improve the efficiency and delivery of their services.
The introduction of income-contingent loans for VET students would require action by the AustralianGovernment as administration of income contingent loans is undertaken through the Australian Taxation Office.
There would also necessarily be associated changes for each state and territory government to consider inexisting VET funding and in enabling VET providers on the ground to cater for any expanded interest in VET
courses that could be expected to come with the augmented availability of income contingent loans.
Coordinated action is already recognized as an essential aspect of healthcare reform, with widespreadchanges needed to bring together the funding of, and interfaces between, primary and hospital care. This is
likely to shift the responsibilities of governments.
There are some recommended reforms for which implementation would need to be preceded by detailed
negotiation between the Australian, state and territory governments. This is typically the case in areas wherestates and territories have a substantial role in implementation or where there is considerable variation inexisting arrangements between states and territories. Healthcare reform also fits in this category.
There has already been considerable progress in mutual recognition of occupational licenses between states
and territories. The Commission has recommended that this process continue to allow default recognition ofoccupational licenses from partner countries and coordination of these with skilled migration requirements. As
was the case in achieving mutual recognition of licenses between states and territories, further negotiation andcoordination between jurisdictions would be necessary to expand mutual recognition to occupational licensing
in other countries. The Australian Government could play a facilitating role in such negotiations.
Reform to road user pricing and funding will require the phasing out of fuel excise (collected by theAustralian Government) and the introduction of distance-based pricing and ultimately congestion charges.
These reforms will need close coordination and mechanisms to diffuse the lessons of various road pricing
trials and road funds between jurisdictions. This would best be implemented via an intergovernmental
agreement to define roles, responsibilities, funding models and timing. Changes to heavy vehicle pricing
could occur outside these processes.

48

Roadmap

Table 2.1 – Prioritised reform directives

Building an
adaptable
workforce

Category A

Category B

Category C• Improve workplace outcomes and ensure a fair sharing of the gains• Support a culture of lifelong learning for an• Enable innovative schoolingfrom productivity improvements (RD. 11)

agile workforce (RD. 4)

approaches for improved• Occupation licensing regimes that are fit-for-purpose (RD. 10)• Increase tertiary education teaching quality tolearning outcomes (RD. 2)• Improve occupational licensing arrangements to reduce barriers

underpin a well-trained workforce (RD. 5)• Regulation that works with

• Better and more flexible matching between

new workforce models

faced by skilled migrants (RD. 9)• A better targeted skilled migration system (RD. 8)• Grow access to tertiary education (RD. 3)• Improve schools’ capacity to lay the educational foundations for the

students and work opportunities (RD. 6)(RD. 12)• VET reform that supports an adaptive
workforce (RD. 7)

future workforce (RD. 1)
Harnessing
data, digital• Maximise the value of government-collected or funded data
holdings (RD. 15)• Faster and more reliable internet access tounderpin productivity growth in regional
Australia (RD. 13)

technology and• Actively promote the diffusion of new

diffusion

knowledge and best practice across thebusiness community (RD. 16)• Cyber security compliance arrangements tounderpin a productive digital economy (RD. 14)
Creating a more
dynamic
economy• Create an investment environment that allows the right activities to occur
in the right places (RD. 18)• Pursue economic resilience through open trade and foreign
investment (RD. 21)• Address lack of competitive market incentives
in highly regulated sectors (RD. 19)• Create a risk protection
system that encourages
entrepreneurship and along-term view (RD. 17)• Transition tax system
incentives to invigorate
productivity growth (RD. 20)49

5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Category A
Lifting
productivity inthe non-market• Implement best practice resource allocation when funding public
infrastructure (RD. 22)• Using health funding approaches to diffuse innovations (RD. 23)

sector

Securing net
zero andadapting to a

• Create policy settings that enable and respect private adaptation
decisions (RD. 25)• Elevate the Safeguard Mechanism to be Australia’s primaryemissions abatement mechanism (RD. 26)

climate at least• Increase the integrity of carbon offsets (RD. 27)• Remove emission reduction measures that are not complementary
to the Safeguard Mechanism (RD. 28)• Pursue a least-cost approach to securing electricity supply (RD. 29)

50

Category C• Promote innovation anddiffusion within government
agencies and regulators(RD. 24)changing
cost

Category B

Roadmap

2.3

Implementation plans

Implementation plans for all Category A reform directives are shown below. The aim of these plans is toprovide key information at-a-glance about the ‘what’, ‘how’ and ‘who’ of each reform directive. The ‘why’ of
the reform directives are contained in the relevant volume along with additional details. The structure of each
1-pager includes:• a statement of the nature of the reform directive• the productivity profile of the reform directive — including the expected productivity impact (higher orlower) and when those impacts are likely to eventuate (short, medium or long term)• actions that governments need to undertake to implement the recommendations under the reform
directive (including which level, and in some cases which agency and/or level of government)• a description of the level of complexity (higher or lower) involved in implementing the reform directive(such as the need to alter legislation or to engage in extensive consultation).
The reform directives and their associated recommendations are listed in table 2.2.

51

Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Table 2.2 – Mapping reform directives to recommendations
Reform directives

Recommendations

Implementation plan

8.1 – 8.2✔

Building an adaptable workforce
1

Improve schools’ capacity to lay the educationalfoundations for the future workforce (Volume 8)

2

Enable innovative schooling approaches for
improved learning outcomes (Volume 8)8.3

3

Grow access to tertiary education (Volume 8)

8.4 – 8.7

4

Support a culture of lifelong learning for an agile
workforce (Volume 8)

8.8

5

Increase tertiary education teaching quality tounderpin a well-trained workforce (Volume 8)

8.9 – 8.12

6

Better and more flexible matching between
students and work opportunities (Volume 8)

8.13 – 8.14

7

VET reform that supports an adaptive workforce(Volume 8)

8.15 – 8.16

8

A better targeted skilled migration system(Volume 7)

7.1 – 7.6✔

9Improve occupational licensing arrangements to
reduce barriers faced by skilled migrants(Volume 7)

7.7 – 7.8✔

10Occupational licensing regimes that are
fit-for-purpose (Volume 7)

7.9 – 7.12✔

11

Improve workplace outcomes and ensure a fairsharing of the gains from productivity
improvements (Volume 7)

7.13 – 7.17✔

12

Regulation that works with new workforce models(Volume 7)

7.18 – 7.19✔

Harnessing data, digital technology and diffusion
13

Faster and more reliable internet access tounderpin productivity growth in regional Australia(Volume 4)

4.1

14

Cyber security compliance arrangements tounderpin a productive digital economy (Volume 4)

4.5

15

Maximise the value of government-collected or
funded data holdings (Volume 4)

4.2 – 4.4

16

Actively promote the diffusion of new knowledge
and best practice across the business community(Volume 5)

5.1 – 5.5, 5.13

52✔

Roadmap

Reform directives

Recommendations

Implementation plan

Creating a more dynamic economy
17

Create a risk protection system that encourages
entrepreneurship and a long-term view (Volume 3)

3.1

18

Create an investment environment that allows theright activities to occur in the right places(Volume 3)

3.2, 3.5 – 3.6

19

Address lack of competitive market incentives inhighly regulated sectors (Volume 3)

3.3

20

Transition tax system incentives to invigorate
productivity growth (Volume 3)

3.4

21

Pursue economic resilience through open tradeand foreign investment (Volume 3)

3.7 – 3.10✔

✔

Lifting productivity in the non-market sector
22

Implement best practice resource allocation whenfunding public infrastructure (Volume 5)

5.7 – 5.8✔

23

Using health funding approaches to diffuse
innovations (Volume 5)

5.6, 5.11✔

24

Promote innovation and diffusion withingovernment agencies and regulators (Volume 5)

5.9 – 5.10, 5.12

Securing net zero and adapting to a changing climate at least cost
6.1 – 6.4✔

Elevate the Safeguard Mechanism to beAustralia’s primary emissions abatement
mechanism (Volume 6)

6.5

✔

27

Increase the integrity of carbon offsets (Volume 6)

6.6

✔

28

Remove emission reduction measures that are notcomplementary to the Safeguard Mechanism(Volume 6)

6.7

✔

29

Pursue a least-cost approach to securing electricity
supply (Volume 6)

6.8

✔

25

Create policy settings that enable and respectprivate adaptation decisions (Volume 6)2653

Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry report

REFORM DIRECTIVE 1
Improve schools’ capacity to lay the educational foundations for the future workforce
Australian, State and Territory Governments should work with schools to:• extend, improve and embed the use of education technology• facilitate greater classroom access for the Australian Education Research Organisation (AERO) to support
more principal and teacher involvement in education research and ensure research is salient and readily
applicable by practitioners• support diffusion of evidence-based teaching practices to the classroom through greater observation andfeedback mechanisms, and curriculum implementation support.
The expected productivity impact of this recommendation is high, and following implementation, thebenefits would likely be realised in the longer term. Spreading best teaching practice and effective
education technologies has implications for the productivity of both the school system (that is, getting moreout of the resources currently being used), and the broader economy as students who benefit from such
reforms could ultimately become more active and productive members of society. While some in-school
productivity improvements could occur sooner, the more important benefit to student outcomes would only
be realised in the longer term.
Specific actions• Enable teaching practices to evolve with the changing classroom environment by prioritising thedevelopment and implementation of digital tools to support teaching and learning, while balancing
flexibility for individual jurisdictions’ needs – this could include developing an online assessment tool andgiving AERO responsibility for researching and vetting effective digital technologies.
• Replace manual school administrative processes with technology-based or automated solutions – this
could include evaluating technology-based solutions for administrative processes currently in place anddeveloping mechanisms to diffuse these to other schools.
• Continuous commitment to ongoing professional development modules that support teachers in using
data analytics to drive student improvement.
• Enable greater observation of, and feedback on, classroom teaching practices, by creating or
strengthening the existing roles for highly accomplished and lead teachers (HALT) to share their in-depth
knowledge and skills with their colleagues.
• Increase curriculum implementation support for teachers, by curating high-quality, evidence-based andgovernment-endorsed curriculum resources (curriculum plans, whole-subject sequences, lesson plans
and classroom tools), to be made available for teachers and school leaders from a single source.
This recommendation has higher complexity. Successful implementation of these recommendations will
require both individual and coordinated action by Australian, state and territory governments andengagement at the individual school level to ensure local needs and objectives are taken into account.

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REFORM DIRECTIVE 3
Grow access to tertiary education
The Australian Government should adopt an improved demand-driven model for providing Commonwealthsupported places to domestic undergraduate university students, subject to measures that contain fiscal
costs and ensure all students are adequately supported.
This recommendation is expected to have a high impact on productivity, and following implementation, thebenefits would be realised in the medium term. Greater access to higher education will benefit students
and productivity. The additional students enrolled as a result of this reform will experience considerable
employment benefits, and this is particularly so in the context of an anticipated spike in school leavers andcontinuing growth in industry need for skilled workers. Compared with the current approach to public fundingof universities, demand-driven funding would also improve incentives to offer quality education and remove a
distorted incentive that prevents course offerings from aligning with skill needs.
Specific actions• The Australian Government should consult on amendments to the Higher Education Support Act 2003
(Cth) with a view to implementing a demand-driven model for funding domestic undergraduate places.
• Several complementary measures recommended in this report will be needed to support a sustainable
and effective demand-driven funding model.
– The costs of expanding access should be contained by increasing the proportion of total course costs
that are paid by students (generally through income-contingent loans).
– Total course funding, comprising the government and student contributions, will need to be based on
the cost of delivery with estimates of this cost refined over time.
– Mechanisms to encourage better quality and improved support for completion will need to be
implemented as the number and diversity of students increases over time.
– Income-contingent loan access should be gradually expanded to more vocational education and training(VET) courses, starting at the Diploma level, to put financing arrangements between the sectors on a moreequal footing so that the expansion of higher education does not come at the expense of VET.
• Where placements are required for graduates to work in their field of study, such as nursing, Australian,State and Territory Governments should ensure an adequate number of placements are available andfunded to meet skill needs.
• There could be phased implementation of a demand-driven system if it appears that universities would
expand places rapidly before they can adjust resourcing to cater effectively to larger cohorts. This may not
be necessary if demand for university places is reduced by strong labour market conditions, as has been
the case recently.
This recommendation has lower complexity. The existing Universities Accord process could be leveraged
to consult on the implementation of this recommendation. Implementing a new funding model would thenrequire the Australian Government to amend the Higher Education Support Act 2003 (Cth).

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REFORM DIRECTIVE 8
A better targeted skilled migration system
The Australian Government should amend the design of temporary and permanent skilled migration visa
programs to improve the composition of the migrant intake.
The expected productivity impact of this recommendation is higher, and following implementation, thebenefits will likely be realised in the medium term. While skilled migration already provides a positive
productivity dividend, the Commission’s suite of reforms would improve productivity and wellbeing moregenerally, through better job matching and lifetime fiscal outcomes of migration.
Specific actions
The Australian Government should:• abolish the Business Innovation & Investment visa program. Temporary migration should be facilitated forpeople with genuine plans to start a business in Australia, while pathways to permanent residency should
involve the revised Skilled Independent, based on a points test that better accounts for income levels and age• remove current list-based restrictions for employer-sponsored temporary and permanent skilled visas andset an income threshold well above the Temporary Skilled Migration Income Threshold (TSMIT) rate. The
income threshold that applies to temporary migration should be lower than for permanent. The income
threshold for the employer-sponsored permanent visa should increase with age, though at some older
age, people would no longer be eligible for this visa
• for the Skilled Independent visa (subclass 189), remove current list-based restrictions. Additional points
should be awarded for ongoing employment in Australia according to income level, with different income
benchmarks for different age groups. The design of the points system should be updated regularly basedon research, such that points are awarded for factors associated with fiscal and employment benefits.
• introduce a pilot of a special permanent visa subclass for occupations in human services sectors that arelargely funded by government (such as aged and disability care), but only if these are facing likely
enduring and significant labour shortages that are weakly responsive to wage increases. The visa
subclass should be subject to the current TSMIT and require that the applicant remain employed in therelevant sector for 4 years. The pilot should be evaluated for its impacts and should be abandoned if
labour shortages can be better met through wage increases and more sustainable alternative funding• amend settings for temporary skilled migration to increase their duration to 6 years• increase the duration of stay for Graduate visa holders with Bachelor and higher-level degrees, such thatan extension to 5 years is guaranteed, subject to proof of ongoing employment above a set wage
threshold. For international students, obtaining a qualification from an Australian tertiary education
provider should be associated with an expectation of being able to test their skills in the Australian labour
market, but not an expectation that their qualification alone will qualify them for permanent residency(which will increasingly depend on labour market outcomes, including income levels, and age)• amend settings for employer sponsored temporary and permanent visas to better allow workers to switch
employer sponsors including by permitting a short period of unemployment to look for a new sponsor.
This recommendation has higher complexity. The Australian Government would be primarily responsible
for these reforms. Given the interactions between visas and the shift away from skill lists towards better
recognition of income and age, the reforms are far-reaching. In addition to extensive consultation,
implementation will require processes to manage system integrity risks, determination of age and income
cut-off points in skilled visas, and further development of the points-based system, among other factors.

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REFORM DIRECTIVE 9
Improve occupational licensing arrangements to reduce barriers faced by skilled migrants
The Australian Governments and regulators should pursue further international mutual recognition ofoccupational licences, including by improving links between Australian licensing bodies and those incountries with comparable standards and systems. The aim is not to allow all international qualifications or
licences to be recognised by default, but to expand recognition of qualifications among trusted partnercountries and to make existing processes more efficient.
The expected productivity impact of this recommendation is higher, and following implementation, thebenefits will likely be realised in the medium term. The reform would allow highly-skilled migrants to havetheir qualifications recognised (and in some cases to be licensed) sooner. This would reduce the amount oftime that skilled migrants spend in Australia unable to work in their chosen occupation, thereby improving thelabour market matching of the migration system. In particular it would likely assist in filling shortages in healthand trades, where a lack of access to services present various costs (such as health and safety risks). For
the migrant, it will reduce the risks of underemployment and unemployment, and potentially improve career
paths — all of which have positive implications for their lifetime fiscal impact.
Specific actions• For licensing bodies that operate at the national level (such as in health):– facilitate a process of collaboration with regulators and/or other institutions (e.g. medical colleges) fromselected countries, with the aim of establishing a default recognition– instigate changes to licensing administration in cases where the process for recognising international
qualifications could be made more efficient (e.g. requiring the migrant to undertake further study to fill
any knowledge gaps rather than to re-take their qualification).
• Take an occupation-by-occupation approach to deciding whether the skills assessment undertaken for
migration purposes (generally by VETASSESS) is warranted given that migrants usually have proof of
qualifications and the assessment is often undertaken by non-experts. In many cases, it would likely bepossible to rely on the assessment of the regulator / licensing body for the purposes of migration.
This recommendation has higher complexity. These reforms will typically require focus on individual
licenses and occupations. They will often involve multiple regulators and levels of government, as well as
regulators and governments overseas. Public health and safety concerns should remain the primaryobjective with regard to licensing, and reforms should be evidence-based.

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REFORM DIRECTIVE 10
Fit for purpose occupational licensing regimes
Australian governments should work with regulators to ensure occupational licensing policy is fit-for-purposeand guided by evidence. Licensing for safety purposes has become more stringent in recent years, but suchdecisions would be better informed by evidence about their impact on lowering risks and costs. There should
be greater consideration of complementary and alternative forms of regulation. At the same time, well-known
issues regarding scope of practice between licensed occupations remain unresolved.
The expected productivity impact of this recommendation is higher, and following implementation, thebenefits will likely be realised in the medium term. Reforms will reduce barriers to competition withoutcompromising safety and service quality — and in some areas improve quality, health and safety outcomesby increasing access to services. In some cases, there are already qualified professionals ready to take on
new responsibilities. In other cases, reform would spur increased entry into the occupation over time.
Adopting better processes for data collection and licensing assessment would improve identification of
inefficient licensing arrangements and better enable geographic mobility in the future. The introduction of digital
licensing and general improvements in market information for consumers also gives governments anopportunity to improve data sharing and analytics and review the rationale for various licensing arrangements.
Specific actions• Australian governments should work with the relevant regulators to re-examine boundary issues relating to
occupational licenses, particularly where independent reviews have already highlighted potential gains.
• Australian governments should undertake trials for expanded scope of practice in health services. Where
service funding is determined by a Commonwealth-State intergovernmental agreement, the AustralianGovernment should allow the funding arrangement to encourage evidence-based trials (e.g. ensuring
trials of novel arrangements in healthcare are appropriately funded through Medicare and/or PBS).
• In developing digital licensing platforms, Australian governments should prioritise choices in technology
and design that enable data collection that can inform effective licensing policy and future information
sharing between jurisdictions.
• Australian governments should conduct regular, independent reviews of occupational licensing systems intheir jurisdictions to improve both efficiency and safety outcomes, efficient scope of practice as well as the
optimal mix of licensing and other forms of safety regulation.
This recommendation has higher complexity. Licensing reform will require clarity on the roles andresponsibilities between different levels of government and regulators, which will vary depending on theregulatory regime. However, reform efforts should not occur on an ad-hoc basis and would benefit from the
support of a broader national reform agenda that can provide pooled resources and better incentives for
substantial regulatory experimentation.
State governments vary in their progress towards creating digital licensing platforms and databases, which
may lead to compatibility problems as integration across jurisdictions occurs. States and territories will needto prioritise technology neutral solutions, standardised systems, and accessible data sharing arrangements.
There is scope to build on recent trials of changes to scope of practice in healthcare. However, governments
need to engage with regulators and industry bodies to ensure safe and proven changes to scope of practice
can progress without undue delay, particularly given current shortages and the need for better access tohealth services.

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REFORM DIRECTIVE 11
Improve workplace outcomes and ensure a fair sharing of the gains from productivity
improvements
The Australian Government should amend the Fair Work Act 2009 (Cth) to facilitate more efficient modern
awards and enterprise bargaining systems to support productivity and to secure mutual benefits for
employers, employees and consumers.
The expected productivity impact of this recommendation is higher, and following implementation, thebenefits will likely be realised in the medium term. The workplace relations system has a fundamentalrole in driving productivity and wages. Making awards more efficient and flexible would help the workplaces
that rely on them and provide benefits through their role as a floor on conditions in enterprise agreements.
Processes for varying awards can be improved and awards themselves could be made easier to use andunderstand. Reducing the barriers to the uptake of bargaining and the enhancing the capacity for employers
and employees to find flexible ways of working can encourage productivity and wage growth. Recent
amendments to the Fair Work Act have sought to address some of the complexities of bargaining, and haveintroduced more scope for multi-enterprise agreements. A comprehensive review will be required to assess
the effects of the amendments on productivity, prices, and competition.
Specific actions• Amend section 134 of the Fair Work Act 2009 (Cth) to clarify the modern award objective, focusing on theneeds of the employed; the need to increase employment; the needs of employers; the need to achieve
gender equality in the workforce; the needs of consumers; the need to ensure that modern awards are easy
to understand; and the likely impact of any exercise of modern award powers on efficiency and productivity.
• Improve the Fair Work Commission’s (FWC) ability to vary awards to better achieve the modern awards
objective, removing some of the rigidities of the current system and targeting those awards with thegreatest potential for improvement.
• In making variations to modern awards, the FWC should consider options that allow employers somechoice about how they can meet award requirements, subject to meeting the modern awards objective
and undertaking appropriate consultation with employees.
• Limit the ability for enterprise agreements to restrict productivity enhancing changes to technology orworkplace practices that are best left to managerial prerogative. This includes amending the Fair Work Act
so that the model consultation term would be the only legally enforceable consultation term in enterpriseagreements. A mechanism that enables the FWC to specifically authorise an alternative enforceable term
should be explored.
• Further loosen the relationship of enterprise agreements with awards by allowing the FWC to approve
agreements that do not pass the Better Off Overall Test if a range of public and private interest tests are
met. Any changes should have adequate protections in place to avoid undesirable outcomes as
exemplified by the Construction, Forestry, Mining and Energy Union v One Key Workforce Pty Ltd.
This recommendation has higher complexity. Amendments to the Fair Work Act will require carefuldrafting and considerable consultation with union and employer groups, business, employees and thecommunity as a whole. The FWC would be given considerable additional discretion under the proposed
recommendations, and it will take some time for the development of case law.

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REFORM DIRECTIVE 15
Maximise the value of government collected or funded data holdings
The Australian Government, in consultation with the private sector and State and Territory Governments,
should improve access to data collected and held by providers of government-funded services by expanding
data sharing between the public and private sectors and implementing a comprehensive health data sharing
system. To avoid eroding trust in the system, there must be a focus on appropriate controls and safeguards.
The expected productivity impact of this recommendation is high, and the benefits would likely berealised in the medium term. Expanded access to data will make business and government analytics
cheaper and better, with improved products and services for consumers, and more informed public policy
and research. In particular, increased data sharing in the health system, by building on existing initiatives
such as My Health Record and drawing on lessons from the successful implementation by the Australian Tax
Office of Single Touch Payroll, can significantly improve service quality for patients. Wider use of the Digital
Identity is likely to lead to more efficient and secure delivery of a range of services that require ID verification.
Specific actions• Extend the Data Availability and Transparency (DAT) Act 2022 (Cth) to allow government data to beshared with the private sector. Implementation should be staged, starting with accredited privateorganisations that use data for policy and research purposes to achieve social objectives, then accredited
businesses for commercial use. Security and privacy safeguards should be maintained.
• Use My Health Record (MHR) as the foundation for a comprehensive system for sharing and using healthdata by implementing several changes:– Opting out of the system: the Australian Government should clarify that patients have the right to opt outof the system and if they have not opted out then practitioners should be required to upload relevant
health records to MHR. The definition of ‘relevant’ records should be determined in consultation withpatients and practitioners.
– Health software compatibility and standards: The Australian Government should publish a register ofsoftware that is integrated with MHR and allows automatic upload of data by healthcare practitioners.
Healthcare providers should be encouraged to use this software; for example, by extending the Practice
Incentive Program eHealth Incentive beyond general practitioners. In the medium-term, conformancestandards should be set, requiring all health software providers to be compatible with MHR by using
consistent language and terminology, and a secure gateway so practitioners can connect with eachother and upload and download relevant records.
– De-identification to support system planning: develop a framework to use MHR data for healthsystem-wide planning and policy development — requiring consultation with practitioners and thecommunity on using data, while maintaining trust in MHR and benefiting the broader system.
• The Australian Government should expand access to the Digital Identity (and work towards adopting asingle national digital identity) across State and Territory Government services requiring ID (e.g. applying
for a drivers licence) and private sector services that require ID (e.g. opening a bank or utility account),with appropriate access controls and safeguards.
This recommendation has high complexity. Legislative changes to the DAT Act would require substantial
stakeholder engagement and staged implementation to ensure that trust is maintained, and appropriate
safeguards are in place. Improving MHR requires change across many healthcare practitioners and, in someparts of the system, software providers, and there would be challenges due to legacy systems and lack ofdigital fluency among some practitioners. The Digital Identity would also require careful implementation toensure it could be used for broader applications in a controlled and secure environment.

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REFORM DIRECTIVE 18
Create an investment environment that allows the right activities to occur in the right places
State and territory governments could make better use of urban land by revising planning regulations toensure residential, commercial and industrial zoning is not unduly restrictive, and by promoting more flexible
and outcome-oriented planning approaches.
Funding models for road infrastructure can be reformed by moving away from fuel excise to distance-based
charging, congestion pricing, and general revenue (and potentially, in the longer-run, to pricing that could
more generally vary by location or time of use). Road funds would be used to allocate funding to where thereturns from investment were highest.
The expected productivity impact of these recommendations is high and would likely be realised in
the medium term. First, improved planning and zoning can help business entry, aiding competition,
dynamism and investment. At a higher level, a more flexible and outcome-oriented approach could improvethe efficiency of land use as a resource. The efficient use of urban land is increasingly important given
home-based work, online retailing, and the need for climate change adaptation.
Road-user pricing would be a significant step towards more efficient investment in public infrastructure. Existingmodels of road funding and investment do not provide signals about where roads should be built and to what
capacity, nor do they limit congestion. Given that excise revenue will fall with electrification, there is a need toprovide an efficient and equitable source of revenue to fund road maintenance and provision.
Specific actions• Reform planning and zoning by:– implementing standardised business and industrial land use zones across local government areas– aggregating existing zones, where possible, to broaden the range of permissible activities– requiring urban planning decision-making processes to consistently consider the community-wide
economic benefits from the introduction of competition to incumbent businesses, recognising thatdynamic local economies allow businesses to exit as well as enter.
• Progress road-user pricing by:– working towards an intergovernmental agreement on road user charging for all vehicle types, focusing
on distance priced charging, including any road damage premiums, and subsequently, incorporatingcongestion charges for crowded roads– considering the inclusion of compulsory third party insurance costs in distance-based charges andmenu options for motorists to choose between higher distance-based charges and lower fixed charges.
This recommendation has higher complexity. Changes to planning and zoning can have complex effects
on urban density, transport flows, public amenities and some markets. Such reforms would be the primary
responsibility of State and Territory Governments, with the involvement of Local Governments. Progress onroad-user charging is complicated by unresolved constitutional challenges, but will, in any case, require all
governments to coordinate their actions. An intergovernmental agreement would help set out roles, clarify
how revenue will be used and allocated, and ensure appropriate funding for local, state and national roads.
In practical terms, distance-based pricing could be established relatively quickly.

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REFORM DIRECTIVE 21
Pursue economic resilience and the benefits of open trade and foreign investment
The Australian Government should pursue economic resilience by harnessing open trade and investment,
recognising the potential expansion of trade in services. Public interventions should focus only on vulnerable
and critical supply chains that present major risks for Australia and cannot be addressed in other ways. The
Australian Government should also ensure its Foreign Investment Review Framework considers its potential
chilling effects on investment.
The expected productivity impact of this recommendation is high, with the benefits likely to berealised in the medium term. Trade in goods and services and foreign direct investment (FDI) are key
sources of competitive pressure for domestic businesses, reduce prices for end-users, and are importantmechanisms for diffusing knowledge and innovation.
Supply chain shocks and global upheaval do not diminish the case for openness. As a small advanced
economy, increased global linkages are likely to be the best way for Australia to build resilience to deal with
global uncertainties. While businesses and governments are reconsidering how to manage the risks
associated with supply chain disruptions, there is the danger that calls for ‘sovereign capability’ canencourage rent seeking, which would entail significant economic costs.
Growth of trade in services stems from the advancement and proliferation of technology, as well as risingincomes among Australia’s trading partners. Australia is well-placed to benefit from import competition andexport opportunities in a number of services.
Specific actions• Take immediate action to unilaterally reduce Australia’s statutory import tariff levels to zero. (Someadministrative architecture may remain to deal with non-tariff regulation at the border.)• Progressively remove Australia’s anti-dumping and countervailing measures and subject any new
measures to an economy-wide cost benefit test.
• Increasingly accept product standards adopted in other leading economies as ‘deemed to comply’,
provided that a transparent review could be undertaken in cases where the Australian Government
identified a significant safety risk.
• Bring application fees for proposed FDI into agricultural land assets closer into line with other forms ofinvestment, including by:– applying indexation to the threshold investment value, as is done with most commercial investments– adjusting the fee tiers so as to reduce the marginal rate fee as a proportion of investment amount.
• Address potential barriers to trade in services both ‘at the border’ and ‘behind the border’. Some relevant
policy and regulatory levers include trade policy, tax settings, occupational licensing, foreign direct
investment, improved recognition of overseas qualifications and temporary migration settings.
This recommendation has high complexity. While eliminating nuisance tariffs is relatively straightforward,
other changes involve greater complexities. Addressing ‘at the border’ and ‘behind the border’ barriers totrade in services will involve a range of policy levers, such as tax settings, occupational licensing andchanges to the regulation of foreign direct investment. Trade protections such as anti-dumping measures
benefit a relatively narrow set of businesses; their removal may warrant broader consideration of the role ofgovernment in facilitating and reacting to structural adjustment. The acceptance of international standards isoften agreed to in principle, but progress needs to be encouraged.

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REFORM DIRECTIVE 22
Implement best practice resource allocation when funding public infrastructure
The Australian, State and Territory Governments should improve institutional and governance arrangementsthat address the systemic absence or disregard of rigorous cost-benefit analysis (CBA). This is particularly
the case for major infrastructure projects and, in the longer term, for other government expenditures, such as
defence and social services. Independent CBAs should be published and provided to government decision
makers before an investment decision is made, and there should be transparency and consistency in theassumptions and inputs used, as well as accountability for how decision makers use (or do not use) results
in project selection.
The expected productivity impact of this recommendation is high. Governments spend tens of billions
on public infrastructure each year. These projects routinely suffer from optimism bias, with large cost
blowouts and long completion delays. Even small improvements from better use of CBA — such as a slightshift in government decision making or a small percentage reduction in cost overruns — would amount tosubstantial efficiency gains in dollar terms. Following the recommendation’s implementation, the benefits
will likely be realised in the short term, as new CBA arrangements and uses could be applied immediately
to subsequent infrastructure investments and project selection.
Specific actions• Governments should ensure that for major infrastructure projects, robust CBAs are undertaken andassessments are published and provided to government decision makers before an investment decision ismade. This should include independent evaluation of the assumptions and inputs used in a CBA, which
could be undertaken by a single institution across Australian, state and territory governments to supportconsistency and comparability across different projects and programs (such as the proposed Evaluator
General at the Australian Government level). It should involve transparency about the analysis, including
on cost and benefit estimates and forecasts and scenario selection, with independent assessments to be
published and provided to government decision makers before an investment decision is made.
Government officials should also align their investment decisions with CBA results and be held
accountable for how the CBA outcomes are used — or not used — in project selection.
• Alliance contracting or collaborative contracting for major infrastructure projects — which involve
contractors earlier in the planning and scoping stages of a project — could improve governments’
understanding of costs and benefits during project planning stages.
• Governments should consider the improvements to institutional and governance arrangements required tosupport consistency and comparability across different projects and jurisdictions. This could be informedby successful models from overseas, including the standardised approach to cost and benefit estimatesused by the US’s Washington State Institute for Public Policy for consistency across a range of programs.
• CBA should also be applied to other government activities like defence and social services, noting thatthese areas are often more complex. These areas are currently predisposed to use other tools forassessment, like cost effectiveness studies, which provide less guidance to governments about how toallocate finite budgets across projects that are very different in nature.
This recommendation has low complexity. The elements of good practice CBA are widely known, andthere are numerous existing CBA evaluation models that can be adopted. There may be some aspects ofgovernance arrangements that need to be tailored for specific levels of government or project types. For
example, the Grattan Institute has recommended that before government funds are committed to an
infrastructure project valued at $100 million or more, independent infrastructure advisory bodies across alllevels of government should have a legislated role to assess the quality and assumptions underpinning the
project’s business case, costs and benefits, and publish this assessment.

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REFORM DIRECTIVE 23
Using health funding approaches to diffuse innovations
Australian governments should reform healthcare funding to improve the functioning of the healthcare
system and should better diffuse best practice in health services that they deliver or procure. They should
use co-operative funding models that support long-term and patient-centred care, to encourage providers toinnovate and better meet consumers’ needs.
With Australian, State and Territory Governments spending a total of $142.6 billion, about 7% of GDP, on
health in 2019-20, the expected productivity impact of this recommendation is high. Following therecommendation’s implementation, the benefits will likely be realised in the medium to long term. The
productivity and welfare costs of inefficiencies and clinical variation in healthcare, such as over-prescriptionof antibiotics or regional variation in preventable hospitalisations, can be reduced by reforming funding
models to encourage a more patient-centred approach with greater focus on longer-term and/or preventativecare. And allocating government funding to procedures and services that have been proven to lead to goodpatient outcomes, such as by regularly updating the Medicare Benefits Schedule (MBS), would be a direct
mechanism for providing medical practitioners with best practice guidance.
Specific actions• The Australian Government should require the Medical Services Advisory Committee (MSAC) toundertake an annual review of selected MBS items so that funding is only provided to treatments that use
current medical best practice. This should be focused on treatments where emerging Australian and/orinternational evidence questions the efficacy or cost effectiveness of existing procedures; treatments that
MSAC has received clinician feedback on doubting their effectiveness; and highly costly treatments thatreceive large government subsidies through the MBS and have not been reviewed in the past 10 years.
The Australian Government should assess the need for higher levels of funding for MSAC to undertakethese annual reviews as a standing function.
• The Australian and State and Territory Governments should work together to accelerate and scale up
long-term co-operative funding mechanisms that align the incentives of primary and hospital providers to
avoid costly hospital admissions. Capitation models, like the Victorian HealthLinks program, andmechanisms supported by the Independent Hospital and Aged Care Pricing Authority are examples thatshould be considered to achieve this.
• Successful implementation of longer term, patient centred and co-operative funding models will also
require overcoming regulatory and legislative obstacles, such as through changes to the Health Insurance
Act 1973 (Cth) (which can restrict the primary health activities that insurers and others can fund) and
improving health data sharing across different parts of the system (between health care providers,
between health care providers and government funders/regulators, and between health care providers
and service users).
This recommendation has high complexity. Regularly updating the MBS would require significant effort
and could require the government to provide MSAC with more resources. Implementing funding models thatalign incentives across the health system and support a longer-term patient-centred approach would becomplex given the highly fractured funding and governance mechanisms across the system.

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REFORM DIRECTIVE 25
Create policy settings that enable and respect private adaptation decisions
Australian, State, and Territory governments should pursue an adaptation policy that: recognises that
individuals, households, and business will continue to be the principal decision makers about which
occupations, sectors, and regions they will transition into as Australia’s climate changes; helps inform these
private decisions; and avoids policy settings that inadvertently constrain them.
This recommendation is expected to have a high impact on productivity, and following implementation, thebenefits would begin to be realised in the medium term. Inadvertently constraining private adaptation
decisions risks placing a growing amount of economic resources at risk over coming decades.
Specific actions
It is recommended that:• Australian governments should avoid the expansion of insurance sector interventions and set a
medium-term time frame for the phase out of the Northern Australia Reinsurance Pool.
• State and Territory governments should mandate the pre-sale disclosure of climate risks facing individual
residential and commercial properties.
• For greenfield developments, the cost of climate risk reduction measures should be incorporated into theprice of buying into the new development, through mechanisms like developer levies, that ensure that
future residents face cost-reflective pricing.
• If transitional assistance is provided to particularly climate-impacted regions, industries and workers, it
should be structured in a way that lets people decide which regions, sectors, and occupations they are
best placed to transition into. It should not be made conditional on recipients committing to live or work in
a particular region, sector, or occupation.
• Proposed adaptation-related infrastructure projects (including projects to rebuild or relocate communities
impacted by large scale natural disasters) should be subject to rigorous cost-benefit analysis thatincorporate plausible climate projections over the projected life of the asset, and compared with that ofalternative proposals. In the case of community rebuilding proposals, a rigorous cost-benefit analysis
would consider the broad range of costs and benefits — cultural, social, economic, and environmental —of rebuilding in-situ with increased defensive measures, relative to rebuilding in an alternative location.
These recommendations have lower complexity as in many instances the benefits come from not
implementing damaging policies and through undertaking better processes in the allocation of resources
towards new adaptation projects. That said, some legislative change at the State and Territory Government
level may be required to implement developer levies.

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REFORM DIRECTIVE 26
Elevate the Safeguard Mechanism to be Australia’s primary emissions abatement mechanism
The Australian Government should progressively convert the Safeguard Mechanism (SM) into Australia’s
primary economy-wide emissions abatement mechanism, covering a wider range of sectors, deepening its
coverage within sectors, and allowing for the transfer of emissions rights from those sectors and facilities thatcan readily reduce emissions to those that face higher abatement costs.
Implementation of this recommendation could be expected to have a high impact on productivity that
could be realised over the short-term in regard to facilities currently captured by the SM, and over the
medium-term in regard to additional facilities that might be included at a later date. This productivity
benefit would principally flow from the reduced risk of investment associated with greater policy certainty forentities that are otherwise ready to pursue efficient emissions abatement. Modelling of the broader Powering
Australia Plan, of which a reformed SM is one element, was estimated to drive $76 billion in investment
between now and 2030. Any policy driven misallocation of this investment could weigh notably on
productivity over the longer-term.
Specific actions
The Australian Government should progressively turn the SM into Australia’s primary economy-wide
emissions abatement mechanism by collectively implementing the following recommendations:• Define SM facility baselines, the total amount of net emissions that captured facilities are allowed to
produce each year, in absolute emissions terms, not emissions intensity terms.
• Expand SM coverage by reducing SM facility thresholds, the total amount of annual emissions that afacility can produce before becoming subject to the SM, from 100 000 tonnes of CO2-equivalent (CO2-e) to
25 000 tonnes of CO2-e.
• Impose SM baselines on individual electricity generators, not at the sectoral level. Failing that, the sectoral
baseline for the grid connected electricity sector should be progressively ratcheted down to remove thebulk of headroom between current emissions and the sectoral baseline, though this would not have thesame efficiency benefits as directly including individual electricity generators in the SM.
• Expand transport sector coverage: once electricity generators are covered at facility level, the SM should
be extended to liquid fuel wholesalers, with downstream vehicle emissions imputed to them.
• Allow generation of sub-baseline abatement credits. If SM baselines are expressed in absolute emissions
terms, SM facilities should be allowed to generate emissions credits for emissions abatement below their
SM baseline.
• No additional Emissions Intensive Trade Exposed Industries (EITEIs) protections should be provided
through the SM. Under the design of the SM, all sub-baseline emissions are allocated for free, providing
inbuilt protection against carbon leakage.
The implementation of the recommendations under this reform directive has lower complexity. They would
be administratively straightforward to implement given that many facilities that would become captured by
the SM over time are already required to periodically report their emissions under the National Greenhouseand Energy Reporting Scheme. The creation of credits for sub-baseline abatement by SM facilities will beenabled by the passage of legislation currently before Parliament (Safeguard Mechanism (Crediting)Amendment Bill 2022).

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REFORM DIRECTIVE 27
Increase the integrity of carbon offsets
The Australian Government should increase the integrity of Australian Carbon Credit Unit (ACCU) offsets as
an instrument for carbon avoidance or removal, increasing the likelihood that the Safeguard Mechanism willachieve credible emissions reductions at least cost over coming years.
Ensuring the integrity of ACCUs is expected to have a high impact on productivity, with the benefits
realised in the short term.
Specific actions• The Australian Government should discontinue the 25-year permanence period option currently available
for sequestration-based ACCU projects.
• The Australian Government should introduce an additional class of sequestration-based ACCUs withpermanence requirements that align with the more enduring permanence provisions of biodiversity
market.
• State and Territory governments should stipulate the volume or the proportion of biogas that needs to be
captured by existing ACCU-generating landfill gas capture projects under existing regulations.
• The Australian Government should require the Clean Energy Regulator (CER) to publish project offset
reports submitted to the CER, and periodic ACCU project audit reports.
This recommendation has lower complexity. Releasing information that is already provided to the CER,
stipulating how existing regulations are enforced, no longer allowing sequestration-based projects to opt-in to25-year permanence periods, and leveraging existing biodiversity market principles to create a new class ofprojects, are comparatively straightforward actions to increase the integrity of carbon offsets.

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REFORM DIRECTIVE 28
Remove emission reduction measures that are not complementary to the Safeguard Mechanism
The reform of the Safeguard Mechanism (SM) should be accompanied by a process to identify and phaseout emissions abatement policies that are not complementary to the SM. New and remaining emissions
reduction policies should have their indirect carbon costs independently estimated and made public.
These recommendations are estimated to have a high impact on productivity, with benefits realised in
the short term. Phasing out higher-cost abatement policies and constraining the introduction of newhigher-cost policies, will promote least-cost emissions abatement and productivity growth.
Specific actions
To give effect to this recommendation:• The Australian Government should commission a review of existing Australian, State, and Territory
emissions abatement policies to assess their complementarity to a reformed SM and recommend atimetable for the removal of non-complementary measures identified by the review.
– A ‘complementary measure’ would be one that either drives emissions abatement from emissions
sources not covered by the SM, addresses market failures that constrain the pursuit of abatement fromemissions sources covered by the SM, or that deliver broader non-carbon abatement related benefits.
• Australian, State, and Territory governments should commit to stipulating how remaining non-Safeguard
Mechanism policies, and new emissions abatement policy proposals, are complementary to the SM, andhave their estimated indirect carbon prices independently estimated and made public.
This recommendation has lower complexity. Reviews of the complementarity of existing climate measures
have been previously commissioned by Australian governments, and methodologies for estimating theindirect carbon price of policy measures are readily available.

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REFORM DIRECTIVE 29
Pursue a least cost approach to securing electricity supply
The government proposed Capacity Investment Scheme (CIS) should be implemented on atechnology-neutral basis and be open to both supply and demand side participation by large scale andsmall-to-medium sized scale electricity users and suppliers, with the latter potentially coordinated through‘virtual power plant’ platforms. An example of demand side participation is a virtual power plant operator thatfunds the installation of the technology required to reduce non-essential electricity demand at those times
when electricity supply is lower than demand, supporting grid stability in the process. The CIS should also be
subject to a five-year sunset clause, with an independent review commissioned to assess the value of its
continuation before deciding whether to extend its life.
These recommendations are estimated to have a high impact on productivity, with benefits realised in
the short term. Failing to underwrite electricity grid stability during Australia’s transition to a renewableelectricity grid risks broader economic disruptions, with associated losses to productivity. Establishing a
potential path back to using variability in wholesale prices as the central intermittence management policy
may also come at lower long run costs than a permanent CIS.
Specific actions
The CIS that Australian, State, and Territory governments have proposed to implement should be:• implemented with a five-year sunset clause, and independently reviewed ahead of any decisions to extend
its life• implemented on a technology neutral basis, allowing for both supply and demand-side participation byhouseholds and businesses• open to both large scale participants and small-to-medium sized participants, potentially aggregated andcoordinated through ‘virtual power plant’ platforms.
This recommendation has lower complexity. Setting the overarching goals that are to be achieved byprojects bidding into the CIS, rather than deciding ex-ante what technologies can achieve those goals, will
lower the search costs for projects that will best deliver desired policy outcomes.

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3.

Recommendations linked toreform directives

Building an adaptable workforce: education
Reflecting the role of education in creating a high skilled and highly adaptable workforce, broad-ranging
reforms are proposed across higher education, vocational education and training (VET), schools andlifelong learning. These reforms emphasise stronger foundational learning to support further skills
acquisition throughout individuals’ working lives via a broader array of flexible options.
Higher education reforms aim to create a more dynamic university sector, putting greater emphasis on
quality teaching. Loan reforms would expand access to high quality VET, and encourage emerging
vocational options that develop broad, adaptive and less occupation-specific skills.
A more coherent approach to lifelong learning and ongoing skill development is based on targeted tax
incentives, and the improved availability and recognition of flexible, short form training options.
Long-term improvements in school outcomes are possible through increasing (and judicious) use oflearning technology and a stronger link between pedagogical evidence and classroom practice. Proposed
reforms focus on assisting governments and schools in this journey.

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Reform directive 1: Improve schools’ capacity to lay the educationalfoundations for the future workforce

Recommendation 8.1
Leverage digital technology in schools
State and Territory Governments should work with schools to extend, improve and embed the use of
education technology in order to realise future benefits for students.
Initiatives should aim to:• enable teaching practices to evolve with the changing classroom environment by prioritising thedevelopment and implementation of digital tools to support teaching and learning, while balancing
flexibility for individual jurisdictions’ needs – this could include developing an online assessment tooland giving the Australian Education Research Organisation (AERO) responsibility for researching andvetting effective digital technologies to be implemented in schools• replace manual school administrative processes with technology-based and automated solutions where
this has not been done already – this could include evaluating technology-based solutions foradministrative processes currently in place and developing mechanisms to diffuse these to other schools• support continuous commitment to ongoing professional development modules that support teachers inusing data analytics to drive student improvement.

Recommendation 8.2
Make best practice teaching common practiceState and Territory Governments should facilitate greater classroom access for the Australian Education
Research Organisation (AERO) to support more principal and teacher involvement in education research toensure that evidence-based research provides information that is salient and readily applicable by practitioners.
Initiatives should focus on:• enabling greater observation of, and feedback on, classroom teaching practices, by supporting more
informal teacher networks, and creating or strengthening the existing roles within the local school
system for highly accomplished and lead teachers (HALT) to share their in-depth knowledge and skills
with their colleagues• increasing curriculum implementation support for teachers, by curating high-quality, evidence-based
and government endorsed curriculum resources (curriculum plans, whole-subject sequences, lessonplans and classroom tools), to be made available for teachers and school leaders from a single source.

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Reform directive 2: Enable innovative schooling approaches for improved
learning outcomes

Recommendation 8.3
Enable experimentation with alternative approaches to schoolingState and Territory Governments should be open to experimenting with new, innovative school models or
operational changes where there is an evidence base (including overseas) to suggest outcomes could be
improved for Australian students.
In the first instance, legislative, regulatory, administrative or policy barriers that would prevent individual
schools varying their operating model should be removed. In addition, there should be capacity andappropriate resourcing within the local school system to allow the merits of any trials to be evaluated.
Innovations should aim to:• offer different lesson delivery options to lift quality teaching and learning, including for example, offering
online classes in the absence of a teacher with the relevant expertise in a topic, or trials of untimed
syllabus approaches to promote a continuous learning process• better cater to student needs to encourage school attendance and lift student outcomes, including
through variations in school hours and use of technology to personalise students’ learning environment.

Reform directive 3: Grow access to tertiary education

Recommendation 8.4
Grow access to higher education over time
The Australian Government should adopt an improved demand-driven model for providing Commonwealthsupported places to domestic undergraduate university students, subject to measures outlined in otherrecommendations that: contain fiscal costs (recommendation 8.5); and ensure all students are adequately
supported (recommendations 8.13 and 8.14).

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Recommendation 8.5
Better targeting of investment in higher education
The Australian Government should introduce a new university funding model to better target investment
while facilitating wider access to higher education.
• Total university funding per student by field of study (comprising the student contribution and government
contribution) should continue to be the cost of delivery for that field (reflecting a median estimate of efficient
costs with the methodology to be refined over time as outlined in recommendation 8.6).
• The student contribution should be set based on average expected earnings for each field of study, withstudents with a greater capacity to repay incurring more debt. Student contributions should be higher,
on average, to recoup a greater share of the costs of university from those who benefit from attending
university, rather than recouping this from the broader tax base. This would also help to fund the return
to a demand-driven system.
• The government contribution should make up the gap between the student contribution and estimatedcost of delivery for each field of study.

Recommendation 8.6
Improve price setting in tertiary education
The Australian Government should conduct regular costing exercises to estimate the cost of delivering
tertiary teaching and research. The methodology underpinning these cost exercises should be periodicallyreviewed and refined to inform more accurate cost estimates, and should aim to ultimately reflect only
efficient costs. These cost estimates should inform funding as well as price and loan caps, to encourage
efficient delivery of quality education and research by tertiary institutions.

Recommendation 8.7
Expand loan eligibility to more students
The Australian Government, in consultation with State and Territory governments, should gradually
expand VET Student Loan eligibility.
• Access should expand to more Diploma and Advanced Diploma level courses. Instead of current criteria, allcourses should be eligible except those that are primarily taken for leisure or have demonstrated poor labour
market outcomes. This expansion should be evaluated after a suitable period, including observed effects ofthe earlier expansion on student participation, course decisions and employment outcomes; and any
evidence of rorting by providers. Following this evaluation, and addressing any implementation issues,eligibility should also be considered for Certificate IV and Certificate III courses.
• Loan fee arrangements should also be equalised across the tertiary sector, levied on all students
regardless of type (that is, extended from fee-for-service VET students and non-university higher
education students to include subsidised VET students and university students). The loan fee rateshould also be lowered reflecting application to a broader base of students.

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Reform directive 4: Support a culture of lifelong learning for an agile
workforce

Recommendation 8.8
Consolidate support for lifelong learning
The Australian Government should consolidate and examine the effectiveness and accessibility ofavailable programs to support lifelong learning and to reduce gaps and increase uptake. In doing so, itshould evaluate the effectiveness of targeted programs to inform and prioritise policies for a consolidated
lifelong learning strategy by:• trialling policies that target support at employed lower-income people, including vouchers for careerplanning and work-related upskilling and reskilling• evaluating the incoming Skills and Training Boost to assess its effects on the uptake of additionaloverall training, the skills it develops, productivity, labour mobility, and the characteristics of thebusinesses most responsive to the measure. Government linked administrative datasets will be usefulfor such an evaluation but might need to be supplemented• extending the existing capacity for self-education deductions to education that is likely to lead to
additional income outside of the employee’s existing employment. This change should be evaluatedafter a suitable period, and pursued subject to assurance that strong integrity measures can effectively
reduce the risks of fraudulent claims• examining the effectiveness of training programs delivered to people who are unemployed and thosetransitioning to work such as Employability Skills Training programs, particularly for people later in life.
Government should also increase the accessibility, flexibility, and coherence of available pathways by:• extending income-contingent loans to more VET courses (recommendation 8.7)
• providing alternative exit opportunities through the provision of nested qualifications(recommendation 8.13)• requiring publicly-funded universities to make their lecture materials available online, with considerationof extending this to some aspects of government-funded VET where that is practically feasible(recommendation 8.9)
• ensuring that the Australian Government’s Microcred Seeker extend beyond courses supplied by
TEQSA-recognised providers to the VET sector and where possible, to other private andwell-recognised domestic and international course offerings• constraining regulations that make acquiring new skills and moving to new occupations overly onerous.
Most particularly, through regular review of occupational licensing policies and addressing issues inscope of practice (reform directive 10).

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Reform directive 5: Increase tertiary education teaching quality to underpin awell-trained workforce

Recommendation 8.9
Leverage information to improve quality
The Australian Government should:• increase the transparency of teaching performance by requiring universities to provide all lectures
online and for free
• refine and validate new Quality Indicators for Learning and Teaching (QILT), and use these and otherdata to develop and publish more meaningful indicators of tertiary teaching quality and performance• adapt the ComparED tool to address the risk that students may misunderstand its information andconsider the option of abandoning it and providing additional QILT data to non-government fundedwebsites that cover many other aspects of higher education providers relevant to student choice• give the Tertiary Education Quality and Standards Agency (TEQSA) the responsibility to undertake
external university teaching quality assurance review processes akin to those applied by the Quality
Assurance Agency (Scotland).

Recommendation 8.10
Professionalise the teaching role
The Australian Government should bolster the incentives for, and prestige of, higher education teaching by:• facilitating trials of additional funding for undertaking research and teaching development provided toindividual staff based on their teaching performance, drawing on the Griffith Business School’s
Teaching Excellence Recognition Scheme (TERS)• trialling a modest Australian Research Council Grant that provides funding for teaching focusedresearch for 6 months to a year
• enhancing preparation for higher education teaching, informed by the evidence collected by initiatives
outlined in recommendations 8.9 and 8.11.

Recommendation 8.11
Develop an Australian evidence base
The Australian Government should extend the role of the Australian Education Research Organisation(AERO) to the collection and dissemination of evidence on best practice post-school teaching, coveringboth VET and higher education. As part of this new role, AERO should also:• draw on the lessons from the teaching practices of awardees of the Australian Government’s AustralianAwards for University Teaching• undertake a rapid review of the use of formative and summative review processes and professional
development initiatives in higher education institutions.

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Recommendation 8.12
Favour light-handed and simple incentives over performance-based funding
The Australian Government should:• put on hold the scheduled commencement of performance-based funding of universities in 2024 andonly reinstitute if its risks are better managed and if other approaches to improving the performance ofuniversities have proved ineffective• explore the option of financial rewards to higher education providers that AERO identifies as having
made successful efforts to improve and use formative assessment tools and professional development(drawing on recommendation 8.11).

Reform directive 6: Better and more flexible matching between students andwork opportunities

Recommendation 8.13
Expand alternative exit opportunities through the provision of nested qualifications
The Australian Government should require that for any given undergraduate degree, Australian higher
education providers create at least one subset of courses that, if completed, lead to a lower level qualification
for students who decide to withdraw before completing the whole degree (‘a nested qualification’).
The Australian Government should leave the design, requirements, and timing of the nested qualification/s
to providers’ discretion, with the exception that any qualification would need to meet the relevant Tertiary
Education Quality and Standards Agency (TEQSA) standards and monitoring requirements.

Recommendation 8.14
Give students support to complete and clarity to exit
The Australian Government should amend the Higher Education Support Act 2003 (Cth) (HESA) tosupport completion where desirable and facilitate early exits where necessary.
It should do this by:• providing grants to encourage higher education providers to experiment with and share new strategies
for student retention• assessing any individual grant for its effectiveness and lessons in post implementation reviews andevaluating the higher education grant program as a whole after six years to determine whether roundsof funding under the grant have contributed to a demonstrable improvement in student completion rates• amending the ‘census date’ in the HESA to the ‘payment date’ and requiring that universities effectively
communicate to students that the payment date is the time when they can exit without having to pay
fees for any initially commenced course.

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Reform directive 7: VET reform that supports an adaptive workforce

Recommendation 8.15
Support a responsive VET sector
The Australian Government, in consultation with State and Territory governments, should continue reforms
that enable the VET sector to support an adaptive workforce and keep pace with industry needs, by:• monitoring the development of training packages under the newly formed Jobs and Skills Councils(JSCs) to:– ensure their development takes place within acceptable timeframes– identify and disseminate best practice and innovative training package design models• prioritising the development of cross sectoral skills standards that are applicable across industries over the
next year to both reduce duplication in training package development for the JSCs and allow individuals
enrolled in the VET system to be assessed against these new standards as soon as possible.

Recommendation 8.16
Improve VET teaching, pathways and partnerships
To ensure the successful implementation of Skills Reform, the Australian Government should:• fund extra training and development programs for VET trainers and assessors so they can adequately
perform independent and proficiency based assessment• task the National Centre for Vocational Education Research to conduct a census of the VET workforce,
focusing broadly on the characteristics of teachers at the provider level, including their pedagogical andoccupational qualifications, as well as industry experience.
The Australian Government, together with State and Territory governments, should also continue toimprove pathways between VET, higher education and industry.
• Other State and Territory governments should monitor and follow the example set by the New South
Wales Government’s Institutes of Applied Technology, and support local models of vocationally oriented
tertiary education that deliver qualifications combining VET and higher education content together withindustry expertise.

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Building an adaptable workforce: migration
Significant reforms to skilled migration could yield large productivity benefits. A shift away fromoccupation-based lists towards wage thresholds as the basis for employer sponsored migration can
re-focus the program on productivity.

Reform directive 8: A better targeted skilled migration system

Recommendation 7.1
Abolishing investor visas
The Australian Government should abolish the Business Innovation & Investment visa program.
Temporary migration should be facilitated for people with genuine plans to start a business in Australia,
while pathways to permanent residency should involve the revised Skilled Independent visa, based on apoints test that better accounts for income levels and age.

Recommendation 7.2
Implementing wage thresholds for employer sponsored visas
The Australian Government should remove current list-based restrictions for employer-sponsored
temporary and permanent skilled visas and set an income threshold well above the Temporary Skilled
Migration Income Threshold rate. The income threshold that applies to temporary migration should belower than for permanent. The income threshold for employer-sponsored permanent visas should increase
with age, though at some older age, people would no longer be eligible for this visa category.

Recommendation 7.3
Improving Skilled Independent visas
For the Skilled Independent visa (subclass 189), the Australian Government should remove current
list-based restrictions, but the points system should be able to award points for any factors shown to be
associated with fiscal and employment benefits. Additional points should be awarded for ongoing
employment in Australia according to income level, with different income benchmarks for different age
groups. Moreover, the design of the points system should be updated regularly based on empirical research.

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Recommendation 7.4
Meeting the needs of human services without stifling wage increases
The Australian Government should introduce a pilot of a special permanent visa subclass for occupations
in human services sectors largely funded by government (such as aged and disability care), but only ifthese are facing likely enduring and significant labour shortages that are weakly responsive to wage
increases. The visa subclass should be subject to the current Temporary Skilled Migration Income
Threshold, and include a condition that the applicant remain employed in the relevant sector for 4 years.
The pilot should be evaluated for its impacts and need after several years.
It should also be abandoned if the Australian Government develops sustainable alternative funding options
for aged care that are sufficient to meet the wage increases required to limit labour shortages.

Recommendation 7.5
Improving temporary migration and pathways to permanent residency
The Australian Government should amend settings for temporary skilled migration to increase theirduration to 6 years, subject to continuous employment (for a set percentage of a given year) with asponsoring employer (with the ability to move to a new sponsoring employer under the same visa).
While temporary skilled migration visas should not come with an expectation of permanent migration, pathways
to permanent migration should be available under revised employer-sponsored and independent skilled visas.
For international students, obtaining a qualification from an Australian tertiary education provider should
be associated with some expectation of being able to test their skills in the Australian labour market, but
not an expectation that their qualification alone will qualify them for permanent residency. The AustralianGovernment should increase the duration of stay for Temporary Graduate visas (subclass 485) for
graduates with Bachelor and higher level degrees, such that an extension to five years is guaranteedsubject to proof of ongoing employment above a set wage threshold.
These changes should be subject to the revised Employer Nominated and Skilled Independent visas, bothof which would place greater emphasis on age and income (recommendations 7.2 and 7.3).

Recommendation 7.6
Improving job mobility for employer-sponsored visas
The Australian Government should amend settings for employer-sponsored temporary and permanent
visas to better allow workers to switch to competing employer-sponsors including by permitting a shortperiod of unemployment while looking for a new sponsor.

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Building an adaptable workforce: occupational

licensing
Following on from automatic mutual recognition of occupational licences, a number of reform directions
are proposed to ensure that licensing is not creating undue barriers to the mobility and adaptability of theworkforce. Streamlining international recognition and expanding allowable scope of practice withinlicensed occupations are key priorities.

Reform directive 9: Improve occupational licensing arrangements to reducebarriers faced by skilled migrants

Recommendation 7.7
Expanding the default recognition of international licences
Australian governments and regulators should pursue further international mutual recognition ofoccupational licences by improving (and potentially formalising) links between Australian licensing bodies
and those in similar countries.

Recommendation 7.8
Aligning migration and occupational license requirements
Australian governments and regulators should coordinate to align skilled migration requirements withoccupational license recognition requirements, including by removing duplication of assessment where
possible.

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Reform directive 10: Occupational licensing regimes that are fit-for-purpose

Recommendation 7.9
Address known issues in scope of practiceAustralian governments should work with the relevant regulators to re-examine boundary issues relating to
occupational licences. In particular, where independent reviews have already highlighted problems or
potential gains to service quality, safety, and productivity, governments and regulators should develop
plans to implement those changes.
As an example, the Australian Government should work with the Australian Health Practitioner Regulation
Agency to expand Medicare Benefits Schedule and Pharmaceutical Benefits Scheme items to nurse
practitioner services that currently receive inadequate funding. Consideration should be given to amending
requirements for collaborative arrangements and to credentialing policy, given their importance to theemployment of Nurse Practitioners.

Recommendation 7.10
Pursue trials into expanded scope of practiceState and Territory Governments should undertake trials for expanded scope of practice in health services
where supported by evidence. Where service funding is determined by an intergovernmental agreement(between state and federal levels) the Australian Government should allow the appropriate funding
arrangements to encourage the use of evidence-based trials.
As an example, State and Territory Governments should undertake similar trials as those run in
New South Wales and Queensland with regard to the prescription scope of pharmacists’ providing
vaccinations and low-risk medications. The Australian Government should ensure that the novel
arrangements that are the subject of these trials are given equivalent funding through the Medicare
Benefits Schedule or the Pharmaceutical Benefits Scheme, where the benefits are substantiated.

Recommendation 7.11
Improved process for regular review of licensing policy
Australian governments should conduct regular, independent review of occupational licensing systems intheir jurisdictions, aiming to improve efficiency without compromising safety outcomes, considering efficient
scope of practice as well as the optimal mix of licensing and other forms of safety regulation. Individual
jurisdictions should drive the process, sharing the findings and conclusions publicly such that otherjurisdictions may benefit. In some cases, the process of review and reform could usefully be driven by thecoordinated efforts of all Australian governments, including through regular meetings at the ministerial level.

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Recommendation 7.12
Digital licensing designed to enable future data sharing and analytics
State and Territory Governments should continue to develop digital licensing platforms, prioritising choices
in technology and design to enable future integration, information sharing and analytics.

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Building an adaptable workforce: workplace

relations and platform work
We propose a suite of practical reforms to labour market regulation to increase the scope for business-levelproductivity improvement while maintaining effective protection of accepted minimum standards.
To promote the productivity benefits of the gig economy while addressing risks to workers, we outline a
regulatory framework with safeguards relating to insurance, safety and dispute resolution.
A renewed focus on awards is a key priority – to expand flexibility for many small businesses, improve
compliance and provide a better basis for formal agreement-making. Incremental changes to the latter would
also make it easier for businesses and workers to make mutually agreed workplace changes through formal
agreements, and re-focus enterprise agreements on their core objective — productivity improvement.

Reform directive 11: Improve workplace outcomes and ensure a fair sharingof the gains from productivity improvements

Recommendation 7.13
A more efficient and fairer approach to adjusting awards
The Australian Government should amend the Fair Work Act 2009 (Cth) to:• replace the paragraphs of s.134(1) with seven paragraphs that cover:(a) the needs of the employed(b) the need to increase employment(c) the needs of employers(d) the need to achieve gender equality in the workforce(e) the needs of consumers(f) the need to ensure that modern awards are easy to understand(g) the likely impact of any exercise of modern award powers on efficiency and productivity.
• remove the need for work value reasons alone for variations to award minimum wages outside of theAnnual Wage Review, allowing the Fair Work Commission to have the same power to adjust award
minimum wages in award reviews as the minimum wage panel currently has in annual wage reviews• make it explicit that the Fair Work Commission should make variations to awards that would better
achieve the modern awards objective, rather than only being required to make changes that arenecessary to comply with the objective• require that when reviewing and varying modern awards, the Fair Work Commission should use robust
analysis to set issues for assessment, prioritised on the basis of likely high yielding gains, and consult
widely with the community on reform options.

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Recommendation 7.14
Introducing menus into industrial awards
In making variations to awards, the Fair Work Commission should seek to include options that allow
employers some choice about how they can meet award requirements, subject to meeting the modern
awards objective and appropriate consultation with affected employees.

Recommendation 7.15
Limit restrictive enterprise agreement content
The Australian Government should limit the ability for enterprise agreements to restrict productivity
enhancing changes to technology or workplace practices that are best left to managerial prerogative by:• leaving employers and employee representatives free to develop mutually beneficial consultation
clauses in enterprise agreements, but amending section 205 of the Fair Work Act 2009 (Cth) so that themodel consultation term (as currently prescribed by Schedule 2.3 of the Fair Work Regulations 2009(Cth)) would be the only legally enforceable consultation term in an agreement if there was a dispute.
• exploring a mechanism that enables the Fair Work Commission to specifically authorise an alternative
enforceable term or limit an excessive term.

Recommendation 7.16
Review of recent bargaining changes
The review of the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth) should
particularly focus on the:• degree to which it has promoted single-enterprise bargaining and achieved productivity-enhancing
improvements in workplaces• use of multi-enterprise bargaining and its effect on wages, prices, competition, and productivity• potential need for further clarification on elements reliant on the Fair Work Commission’s discretion.

Recommendation 7.17
Disentangle enterprise agreements from awards
The Australian Government should explore methods to further loosen the relationship of enterpriseagreements with awards when there is genuine agreement between employees and employers. Thisshould include an amendment to the Better Off Overall Test such that even if some employees are worse
off from a change in an agreement, the Fair Work Commission could nevertheless approve an agreement
if a range of public and private interest tests were met, including the degree to which the benefits towinners are larger than the losses to losers.
Any changes should have adequate protections in place to avoid undesirable outcomes as exemplified by
the Construction, Forestry, Mining and Energy Union v One Key Workforce Pty Ltd case.

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Reform directive 12: Regulation that works with new workforce models

Recommendation 7.18
Introduce independent dispute resolution for platform workers
The Australian Government should introduce an external, independent dispute resolution function within
the Fair Work Commission that can provide conciliation and arbitration services relating to suspension or
termination disputes or non-payment of earnings. The function should be funded by platforms and should
be designed to encourage platforms to improve internal processes, rather than relying on the external
body as the primary method of resolving disputes.

Recommendation 7.19
Evaluate insurance arrangements for platform work where there are significant risks to workers
Governments should evaluate insurance arrangements of classes of platform work where there are
significant risks to worker safety, drawing on data and consultation with platforms, workers and theirrepresentatives. Classes of platform work that are likely to be of initial interest are those with many
workers or total hours worked and those where there are material risks to work health and safety.
Where insurance arrangements are insufficient, governments should consider at minimum mandating abaseline level of insurance to be provided and paid for by platforms, or creating an industry-wide
insurance scheme, or extending workers compensation. Each of the policy options would be best fundedby the covered platforms. The appropriate policy option will depend on the class of platform work and its
risks, and implementation considerations such as the existing level of insurance provided by platforms andthe financial sustainability of the scheme.

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Harnessing data, digital technology and diffusion
Innovation policy should broaden and give more emphasis to the spread and adoption of new technology andbest practice. In particular, adoption of digital technology, such as AI, and the better use of data by businesses
can boost productivity and be encouraged by government action. Reforms are proposed to further extend data
sharing, improve funding of digital infrastructure and streamline cyber reporting regulation.

Reform direction 13: Faster and more reliable internet access to underpin
productivity growth in regional Australia

Recommendation 4.1
Better access to digital infrastructure in regional communities by improving funding mechanisms
The Australian Government should more efficiently and transparently fund digital infrastructure
investments to motivate improved provision in Australia’s regional communities.
This would ultimately require a transition in funding arrangements from the current patchwork of programs
to a single market-based tender mechanism for delivering the Universal Service Guarantee, once themarket for internet connectivity services across all technology types (fixed line, mobile, satellite) is
sufficiently competitive to support such an arrangement.
The government should request that the Australian Communications and Media Authority and/or theAustralian Competition and Consumer Commission undertake market testing to understand whether it iscurrently feasible or, if not, when technology improvements and new market entrants would enable a more
efficient tender mechanism to be implemented.
In the meantime, governments should improve transparency about how funding is allocated for existingregional digital infrastructure programs, including publishing the reasons for funding decisions andevaluating the outcomes of previous investments.

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Reform direction 14: Cyber security compliance arrangements to underpin a
productive digital economy

Recommendation 4.5
A single interface for cyber incident reporting
The cost for businesses of complying with cyber security regulations should be reduced by streamlining
incident reporting requirements, with all reporting to occur via a single online interface. The operating
system underlying this interface would then direct reports to the Australian Cyber Security Centre or otherrelevant government agency as required. This could provide the platform for the government to work withcyber security software providers to build incident reporting functions into commonly used software, sothat reports are automatically sent to relevant agencies if an incident occurs.

Reform direction 15: Maximise the value of government-collected or fundeddata holdings

Recommendation 4.2
Expanding use cases for the Australian Government Digital Identity
The Australian Government, working with the Council on Federal Financial Relations, should increase accessto its Digital Identity so that State and Territory Government services that require identity verification (such as
applying for a driver’s licence) and private sector services that require identity verification (such as opening abank or utility account) are able to use the system, with appropriate access controls and safeguards.
Governments should work towards adopting a single national digital identity, rather than different
jurisdictions having fragmented identity systems that require citizens to verify their identity withgovernments and businesses through different channels.

Recommendation 4.3
Private sector access to government data
The Australian Government should enable government data to be securely shared with the private sector,
so that not-for-profit organisations and businesses can undertake research and develop improved
products and services for Australians.
This could be enabled by extending the Data Availability and Transparency Act 2022 (Cth). Extension could be
gradual, starting with accredited private organisations using the data for policy and research purposes toachieve social objectives, before being opened for accredited businesses to use the data commercially.
Appropriate safeguards should be employed to ensure security and privacy concerns are addressed, and thegovernment could consider utilising advances in technology for individual privacy preservation.

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Recommendation 4.4
Sharing data from government-funded services
The Australian Government should increase the safe sharing and use of data collected by government-funded
service providers, including community, not-for-profit and private organisations. This would include identifying
relevant data that could be safely shared and linked to benefit individuals receiving services, setting technicalstandards for data sharing to promote interoperability, and using funding levers to incentivise service providers
to gather and share data that could improve service delivery and productivity.
Healthcare data should be targeted in the first instance to enable wellbeing benefits for individuals andproductivity benefits at the practitioner and system levels. This could be implemented using My Health
Record (MHR) as the foundation for a comprehensive data sharing system, and include provisions for:• opting out of the system: Where consumers have not exercised their right to opt out of the system,
practitioners should be required to upload agreed relevant health records to MHR. Patients that opt out
should be required to confirm their decision each year after discussing with their general practitioner• health software compatibility and standards: In the short term, the Australian Government should publish aregister of health practice software that is integrated with MHR. In the medium term, it should set
conformance standards that require all health practice software to be compatible with MHR to enable
ready uploading of relevant records to MHR and extraction of patient data in an easy-to-use, secure andtransferable format. The standards should also include consistent language and terminology, and asecure gateway to enable practitioners using different software to connect with each other• de-identification to support system planning: The Australian Government should, in consultation withhealthcare practitioners and the community, develop a framework for using the data in MHR in ade-identified way for health system-wide planning and policy development.
To support seamless service delivery, safe sharing of data held by government-funded service providers
outside of healthcare — such as school education, childcare, aged care, criminal justice, community services
and infrastructure contracts — should also be investigated and facilitated by the Australian Government.

Reform direction 16: Actively promote the diffusion of new knowledge andbest practice across the business community

Recommendation 5.1
An enabling environment for small business access to finance
The Australian Government should monitor the effects of APRA’s changes to capital requirements and risk
weights for loans to small and medium enterprises (SMEs) that are not secured by property, and theactivities of the Australian Business Securitisation Fund, to understand whether they are having thedesired impacts on SME lending. Adjustments or further responses could be required if barriers to SMEs
accessing finance remain. APRA may need to collect more detailed data about business lending to enable
the government to undertake this monitoring.

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Recommendation 5.2
An industry-agnostic approach to the National Industry PhD Program
The Australian Government should actively promote innovation diffusion across a range of industries as part ofits role in capability building. By adjusting the National Industry PhD Program so that it is industry ‘agnostic’ anddoes not preference applications aligned with the National Manufacturing Priorities, the Government could
encourage diffusion of new knowledge and best practice into the services and social sciences.

Recommendation 5.3
Improving collaborative networks and knowledge transfer
Governments could strengthen collaborative networks for diffusion and facilitate knowledge transfer through:• trialling government-funded extension services, which have so far been focused on the agricultureindustry in Australia, to support diffusion of technical knowledge and relevant technologies in othersectors. The initiative should be tailored by sector depending on what services are relevant for mostsmall businesses in that sector, with early engagement between government and businesses to identify
the types of services that would be most beneficial• requiring open access for government funded research in journals, papers and publications that iscurrently locked behind paywalls. In implementing this change, the government should compare thebenefits and costs of the Chief Scientist’s proposed open access model with the benefits and costs ofother potential approaches• partnering with intermediaries — such as industry associations and other advisory or network bodies —that have existing connections between industry, government, researchers and markets when
implementing programs to support diffusion (such as capability development initiatives and extension
services). This would enable governments to reach a wider audience with their diffusion initiatives.

Recommendation 5.4
Reducing administrative barriers to academic consulting
The Australian Government should reserve the right to facilitate more consulting by university academics,
should universities be unable or unwilling to lower unnecessary administrative barriers that disincentivise
academics from undertaking consulting. This could be incorporated into the Australian Universities
Accord, with the government setting guiding principles to govern universities’ approaches to academic
consulting and standardised processes and fee requirements.

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Recommendation 5.5
Using government-held data for benchmarking purposes
Government agencies should use data they collect to help businesses benchmark their performance andprovide insights that promote diffusion of best practice.
• Existing efforts to provide data collected from businesses back to businesses for performancecomparison purposes, such as those by the ABS, ATO and ABARES, should be extended — forexample, by making benchmarking tools with tailored results accessible online, or by accompanying
benchmarking results with other analysis such as case studies on best practice.
• Other opportunities to use government-held data for benchmarking should be explored, including inspecific sectors where applicable (for example, APRA and ASIC data for financial services and ACCC
data for various consumer products).

Recommendation 5.13
No-cost or low-cost access to ideas that have large public good value
To support the diffusion of best practice and knowledge that has already been generated by innovative
businesses, not-for-profits and government organisations, the Australian Government should:• make mandatory standards freely available and look at new funding models for Standards Australia toreduce or eliminate the pricing of voluntary standards that have high public good value• require open access to research principally funded by governments (see recommendation 5.3 of thisreport for further detail)• reform fair use provisions in intellectual property regulations to adopt a principles-based fair use
exception.

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Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry reportCreating a more dynamic economy
A dynamic economy is a proven ‘machine’ for spreading innovations. Proposed reforms to boost
competition, business entry, investment and dynamism go beyond general competition law to include
general settings like tax, trade and regulation (e.g. planning).
A proposed generational review would focus on Australia’s fragmented private and social insurance
arrangements, where short-term changes can pave the way for substantial long-term reform.
Technology-enabled pricing is a big emerging opportunity. Incremental reforms to apply it to transport canboost productivity through better infrastructure decisions and improving mobility.

Reform directive 17: Create a risk protection system that encourages
entrepreneurship and a long-term view

Recommendation 3.1
A generational review and reform process for Australia’s risk protection ‘system’
Government could commence a review of Australia’s risk protection and social insurance arrangements,
focusing on:• encouraging individual entrepreneurship• removing barriers to innovative service models by insurers• fostering efficient mitigation and early intervention.
In the near term, incremental gains could be made by progressing:• abolition of stamp duty on insurance premiums• continued incremental expansion of the range of out of hospital services that private insurers can fund• targeted exemptions from risk equalisation for innovative, evidence-based preventative initiatives byhealth insurers• greater flexibility for life insurers to fund (on a discretionary basis) some approved health-like services,
particularly in areas like mental health• increased sharing of government held or funded data, particularly data collected through healthproviders (recommendation 4.4)
• continued exploration of the ‘insurance approach’ in government programs through measures such as
payment by results, social impact bonds, actuarial evidence and innovation funds.

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Reform directive 18: Create an investment environment that allows theright activities to occur in the right places

Recommendation 3.2
More flexible and streamlined planning and zoning
State and Territory Governments should revise their planning regulations to ensure residential,commercial and industrial zoning is not unduly restrictive. This should include:• implementing standardised business, and industrial zones across local government areas• aggregating existing business and industrial zones to reduce the number of zones where possible andto broaden the range of permissible activities• ensuring that urban planning decision-making processes consider the introduction of competition to
incumbent businesses as a positive outcome.

Recommendation 3.5
The next steps toward road user charging
Australian governments should work towards an intergovernmental agreement on road user charging for
all vehicle types, focusing on distance-priced charging including any road damage premiums, andsubsequently, incorporating congestion charges for crowded roads. The agreement should set out theroles of the different level of governments, how road funds and trials should be implemented, and theappropriate transition pathway away from fuel excise.
In developing a new pricing regime, Governments should consider the inclusion of compulsory third party
insurance costs in distance-based charges and menu options for motorists to choose between higher
distance-based charges and lower fixed charges.
The appropriate level of distance-based and fixed road charges, and the desirable extent of exemptions
and concessions, should be based on trials and the experiences of overseas jurisdictions that havealready employed them.
Ultimately, governments should work towards the longer-term objective of more efficient pricing of roaduse, including through the use of congestion charging in urban centres.

Recommendation 3.6
More efficient public transport fare settings
Public transport fares across all states and territories should apply the pricing framework used by the
NSW Independent Pricing and Regulatory Tribunal, including consideration of fares that take into accountpeak-time crowding, reduced road congestion, distance-based charges and fares that reflect the lower
costs of buses compared with trains.
States and territory governments without independent bodies to make jurisdiction-specificrecommendations should improve fare setting through other channels, such as publishing pricing
strategies and rationales for decisions, and increasing fares annually by growth in public transport costs.

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Reform directive 19: Address lack of competitive market incentives in highly
regulated sectors

Recommendation 3.3
Improve competitive pressures in highly regulated sectors
The Australian Government should remove impediments to competitive pressures in sectors where it has
a substantial regulatory footprint. In the first instance, this could include:• assessing the implications for competition, health outcomes and productivity of regulatory arrangements
in private health insurance, as part of the generational review of Australia’s risk protection and social
insurance arrangements (recommendation 3.1)
• removing anti-competitive regulations on the ownership and location of pharmacies.
Other sectors where the Government has a large regulatory footprint should similarly and subsequently be
examined to remove any impediments to competitive pressures that are not supporting a broader social orenvironmental policy objective.

Reform directive 20: Transition tax system incentives to invigorate
productivity growth

Recommendation 3.4
Transition the tax system to reinvigorate productivity growth
In their use of the tax system for fiscal consolidation over the next decade, governments should, including
through the Council on Federal Financial Relations, systematically transition the tax system to besupportive of productivity growth through tax arrangements that:
•
•
•
•
•

94

promote skilled labour supply
improve tax neutrality in respect of savings and investment
encourage efficient asset transfers and capital allocation
foster market entry and competition
support efficient risk management by firms and individuals.

Recommendations linked to reform directives

Reform directive 21: Pursue economic resilience through open trade andforeign investment

Recommendation 3.7
Pursue trade resilience through openness
The Australian Government should pursue economic resilience by harnessing open trade. Public
interventions in vulnerable and critical supply chains should be considered as a last resort, given the
incentives for and capacity of private businesses to manage supply chain risks. Calls for assistance invulnerable and critical supply chains should be subject to assessment of economy-wide net benefits by
the Office of Supply Chain Resilience, with some form of transparent, public reporting on the justification
and/or costs of any intervention.

Recommendation 3.8
More open trade and greater recognition of international standards
The Australian Government should promote open and resilient trade in goods including by:• reducing Australia’s statutory import tariff levels to zero• progressively removing Australia’s anti-dumping and countervailing measures, and subjecting any new
measures to an economy-wide cost-benefit test.
• increasingly accepting product standards adopted in other leading economies as ‘deemed to comply’,
provided that a transparent review could be undertaken in cases where the Australian Government
identified a significant safety risk.

Recommendation 3.9
Addressing potential chilling effects of the Foreign Investment Review Framework
While the Australian Government should ensure its Foreign Investment Review Framework is fit for its
purpose in addressing fraud and strategic risks, its design should be cognisant of the potential chilling
effects on investment and subsequent costs to productivity. Application fees for proposed foreign direct
investment (FDI) should not be used as a tax base.
More specifically, application fees for proposed FDI into agricultural land assets should be brought closer
into line with other forms of investment, including by:• applying indexation to the threshold investment value, as is done with most commercial investments• adjusting the fee tiers so as to reduce the marginal rate fee as a proportion of the investment amount.

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Recommendation 3.10
Prepare for increased global trade in services
In order to ensure the Australian economy is well-placed to benefit from the global increase in trade inservices, Australian governments should reduce barriers to trade in services both ‘at the border’ and‘behind the border’. This will require consideration of not only trade policy (recommendations 3.7 and 3.8),
but also tax settings (recommendation 3.4), occupational licensing (recommendations 7.9 to 7.12), foreign
direct investment (recommendation 3.9), improved recognition of overseas qualifications(recommendations 7.7 and 7.8) and temporary migration settings (recommendation 7.5).

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Lifting productivity in the non-market sector
Governments should persevere with the hard work of driving innovation and spreading good practice intheir own services. Reforms to funding models will be a key enabler of service innovation.
The innovation ‘ecosystem’ in much of the non-market sector is incomplete. Reforms focus on
strengthening the role of public bodies to spread ideas and best practice; more transparency and betteruse of data to inform consumers, funders and regulators.
Health reform is a work in progress; next steps toward integrated patient-centred, data enabled care candrive long-term productivity benefits.

Reform directive 22: Implement best practice resource allocation whenfunding public infrastructure

Recommendation 5.7
Collaborative procurement on major projects to increase productivity
The Australian, State and Territory Governments should improve the quality and productivity outcomes ofpublic infrastructure projects by increasing the use of alliance contracting or collaborative contracting for
major projects, so that contractors are involved earlier in the planning and scoping stages of a project. This
could also include building incentives into contracts for the achievement of certain targets or standards.

Recommendation 5.8
Improving the efficacy of public expenditure through better investment decisions
Governments can improve the efficacy and productivity outcomes of public expenditure throughinstitutional and governance arrangements that address the systemic absence or disregard of rigorouscost-benefit analysis (CBA) for both major infrastructure projects and in other government activities, suchas defence and social services. Such arrangements should include:• independent evaluation of the assumptions and inputs used in a CBA, which could be undertaken by asingle institution across the State, Territory and Commonwealth levels to support consistency andcomparability across different projects and programs. The proposed Evaluator General at theCommonwealth level could be a starting point for this improvement• transparency about the analysis, including on cost and benefit estimates and forecasts and scenario
selection, with independent assessments to be published and provided to government decision makers
before an investment decision is made• government officials aligning their investment decisions with CBA results, and being held accountablefor how the CBA outcomes are used — or not used — in project selection.

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Reform directive 23: Using health funding approaches to diffuse innovations

Recommendation 5.6
Using health and human service funding approaches to improve diffusion
Governments should use their funding and procurement approaches to drive improved efficacy, innovationand diffusion in health and human services that they deliver or contract external service providers todeliver. This could include:• improving the diffusion of good practice in primary healthcare by regularly updating the Medicare
Benefits Schedule (MBS) to reflect effective treatments. The Medical Services Advisory Committee(MSAC) should be required to undertake an annual rolling review of selected MBS items, focusing on
treatments where emerging evidence or clinician feedback questions their efficacy or cost effectiveness.
The Australian Government should assess the need for higher levels of funding for MSAC to undertakethese annual reviews as a standing function• implementing funding models that support the diffusion of innovation in healthcare, including
preventative care, and a more patient-centred approach by aligning incentives across different parts of
the health system. This includes by accelerating and scaling up long-term co-operative funding
mechanisms that align the incentives of primary and hospital providers to avoid costly hospital
admissions and support integrated care, such as capitation models that have demonstrated successand other mechanisms supported by the Independent Hospital and Aged Care Pricing Authority.
Governments should also seek to overcome obstacles to implementing co-operative models, such aschanging the Health Insurance Act 1973 (Cth) and improving data sharing• encouraging human service providers to innovate and compete to meet consumers’ needs by providing
citizens with more control over how government funding allocated to these services is spent. This could
apply to the allocation of housing assistance to people rather than properties, end-of-life care, publicdental services and healthcare• increasing default contract lengths to 5–7 years for government-funded services delivered bycommunity organisations to support innovation and diffusion. Suitable contract lengths will depend on
the type of service provided, and the lengths of contracts that are retendered could be reconsidered
upon their expiry.

Recommendation 5.11
A bigger role for diffusion bodies
Expand or strengthen the role of existing diffusion bodies — such as the Australian Commission on Safety
and Quality in Health Care, Aged Care Research and Industry Innovation Australia, Australian Education
Research Organisation, CSIRO and Australian National Audit Office — with the aim of disseminating bestpractice, including the elimination of practices no longer underpinned by adequate evidence. Trial
innovation funds in selected public services where there is no existing body for diffusing best practice,such as in mental health service delivery.

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Reform directive 24: Promote innovation and diffusion within government
agencies and regulators

Recommendation 5.9
Using performance data on government services to diffuse best practice
Governments should collect and use data on service outcomes and provider performance to benchmark
their own service delivery and diffuse best practice. This should go beyond simple descriptive
performance comparisons by providing more like-with-like comparisons, so that governments and service
providers can understand what is driving differences in performance and how, when not justified, thesedifferences could be narrowed.

Recommendation 5.10
Recruiting public sector workers from overseas to bring in global best practice
Improve the diffusion of global best practice in the public service by loosening the security and citizenshiprequirements, and overly bureaucratic processes, which currently limit the recruitment of workers fromoutside Australia who bring innovative ideas and different models to the public service. This could include
expedited security approval processes for overseas workers who have already obtained similar levels of
security clearance in their home country, where Australia has a security or intelligence agreement withthat country (for example, the Five Eyes alliance).

Recommendation 5.12
Encouraging regtech development and diffusion
Governments should support greater use of productivity-enhancing regtech by:• providing regulation in forms that lend themselves to regtech solutions, such as coding regulatory rules
into machine-interpretable documents, like the NSW Government’s machine-readable version of theCommunity Gaming Regulation 2020. New regulations that are likely to be amenable to a regtech
solution should be implemented in a machine-interpretable format at the outset, to avoid the need to go
back and codify such regulations in the future• working with software providers to identify areas where they could improve foundational settings toencourage industry to design compliant regtech solutions. The Fair Work Commission’s efforts todevelop an application programming interface that enables software providers to directly access its
awards database, in co-design with stakeholders, is an example of such an improvement.

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Securing net zero and adapting to a changing
climate at least cost
Adapting to climate change and achieving net zero at least cost will be key determinants of Australia’s
future productivity performance.
Proposed reforms make use of existing policy levers — broadening and strengthening the safeguardmechanism, maximising confidence in the integrity of offsets, and ensuring individuals and businesses
have the necessary information to make decisions that reduce their future climate adaptation costs.

Reform directive 25: Create policy settings that enable and respect private
adaptation decisions

Recommendation 6.1
Avoid government subsidised reinsurance schemes
Australian governments should avoid expansion of climate-related insurance sector interventions and set
a medium-term time frame for the phase out of the Northern Australia Reinsurance Pool. Government
interventions in private insurance markets risk subsidising the movement of individuals, households, andbusinesses into harm’s way, and increasing overall adaptation costs. Setting a medium-term time frame
for the phase out of the Northern Australia Reinsurance Pool would provide time for private insurance
providers to secure alternative reinsurance services.

Recommendation 6.2
Helping to inform adaptation investment decisions
Households and businesses should be provided with the information they need to make informed
adaptation decisions. State and Territory governments should mandate the pre-sale disclosure of climate
risks for all residential and commercial property sales.
• Such disclosure should be based on existing climate change projections and cover a range of physicalrisks including riverine flooding, sea level rise, subsidence, fire and other natural disasters.
• This disclosure could operate in the same way that States and Territories mandate the pre-saledisclosure of building reports.
For new greenfield developments the cost of climate risk reduction measures should be incorporated into
the price of buying into the new development, through mechanisms like developer levies, which will help
ensure that future residents face cost-reflective pricing.

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Recommendation 6.3
Transitional assistance should not distort adaptation decisions
If transitional assistance is provided to climate-impacted regions, industries, and workers, it should be
structured in a way that lets people decide which regions, sectors, and occupations they are best placed
to transition into. It should not be made conditional on recipients committing to live or work in a particularregion, sector, or occupation.

Recommendation 6.4
Cost-benefit analysis for adaptation-related infrastructure projects
Proposed adaptation-related infrastructure projects (including projects to rebuild or relocate communities
impacted by large scale natural disasters) should be subject to rigorous cost-benefit analysis thatincorporates plausible climate projections over the projected life of the asset and compared with that ofalternative options. In the case of community rebuilding proposals, a rigorous cost-benefit analysis would
consider the broad range of costs and benefits - cultural, social, economic, and environmental - ofrebuilding in-situ with increased defensive measures, relative to rebuilding in an alternative location.

Reform directive 26: Elevate the Safeguard Mechanism to be Australia’s
primary emissions abatement mechanism

Recommendation 6.5
Make the Safeguard Mechanism Australia’s primary emissions abatement mechanism
To increase certainty, reduce investment risk, and promote least-cost abatement, the AustralianGovernment should progressively make the Safeguard Mechanism (SM) Australia’s primaryeconomy-wide abatement mechanism. To this end, the Government should collectively implement thefollowing changes to the SM over time:• define SM baselines, the total amount of annual net emissions that captured facilities are allowed to
produce, in absolute emissions terms, not emissions intensity terms• expand SM coverage by reducing SM facility thresholds, the total amount of annual emissions that afacility can produce before becoming subject to the SM, from 100,000 to 25,000 tonnes of CO2-e• impose SM baselines on individual electricity generators, not at the sectoral level. Failing that, thesectoral baseline for the grid connected electricity sector should be reduced, removing the bulk of theheadroom between current emissions and the sectoral baseline, though this would not have the same
efficiency benefits as directly including individual electricity generators in the SM• expand transport sector coverage: once electricity generators are covered at facility level, the SMshould be extended to liquid fuel wholesalers, with downstream vehicle emissions imputed to them
• allow generation of sub-baseline abatement credits. If SM baselines are expressed in absoluteemissions terms, SM facilities should be allowed to generate emissions credits for emissions abatement
below their SM baseline.
• no additional Emissions Intensive Trade Exposed Industries (EITEIs) protections should be provided
through the SM. The SM already provides the majority of emissions rights for free, and will continue todo so for the foreseeable future.

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Reform directive 27: Increase the integrity of carbon offsets

Recommendation 6.6
Increase the integrity of carbon offsets recognised by the Safeguard Mechanism
To make emissions reductions credible, the Australian Government should discontinue the 25-yearpermanence period for sequestration-related ACCU projects, introduce an additional class ofsequestration-based ACCUs that align with the more enduring permanence provisions of the biodiversity
market, and publish offset reports and project audit reports required by the Clean Energy Regulator. Stateand Territory Governments should stipulate the proportion of biogas that needs to be captured by existing
ACCU-generating landfill gas capture projects under existing regulations.

Reform directive 28: Remove emission reduction measures that are notcomplementary to the Safeguard Mechanism

Recommendation 6.7
Phase out policy measures not complementary to the Safeguard Mechanism
Policy measures that are not complementary to the Safeguard Mechanism (SM) should be phased out to lower
the overall cost of abatement. A review of existing measures should be undertaken to assess theircomplementarity to a reformed SM and recommend a timetable for the removal of non-complementarymeasures identified by the review. A ‘complementary measure’ would be one that either drives emissions
abatement from emissions sources not covered by the SM, addresses market failures that constrain the pursuitof abatement from emissions sources covered by the SM, or deliver broader non-carbon abatement related
benefits. Remaining non-Safeguard Mechanism policies should (1) stipulate how they are complementary to
the SM, and (2) have their estimated abatement costs independently estimated and made public.

Reform directive 29: Pursue a least-cost approach to securing electricity supply

Recommendation 6.8
Pursue a least-cost approach to securing electricity supply
The proposed Capacity Investment Scheme should be implemented with a five-year sunset clause, andindependently reviewed ahead of any decision to extend its life. It should be implemented on a technology
neutral basis, allowing for both supply and demand-side participation by households and businesses.

102Inquiry conduct and participantsA

Inquiry conduct and participantsThis appendix describes the stakeholder consultation process undertaken for the inquiry and lists theorganisations and individuals who have participated.

Inquiry terms of reference
The terms of reference for the inquiry was received from the Treasurer on 7 February 2022 and is viewable
on the inquiry website. The inquiry was advertised in The Australian on the 14 February 2022.

Engagement with inquiry participants
The Commission issued a call for submissions paper on 21 February 2022. From August to October 2022, it
released six interim reports outlining its early analysis and reform directions in inquiry topic areas. Throughout
the inquiry, the Commission held and benefited from the following consultation processes:• Four roundtables (table A.4)
– Tertiary education– Migration– Digital, data and innovation– Modelling• Two days of public hearings (table A.5)
– Melbourne (7-8 November)– Hearings were advertised in The Australian on 26 October 2022 and through an email to registeredinquiry participants• About 150 meetings were held with stakeholders across Australia (table A.3)
The Commission received 203 public submissions during the inquiry and also provided facilities on theinquiry website for interested stakeholders to lodge a brief comment (tables A.1 and A.2).
Table A.1 – Number of submissions and comments received
Pre-interim reports

Post-interim reports

Total

Submission

74

129

203

Comments

2

15

17

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Table A.2 – Submissions received
Participants

Submission no.

88.io

183

Actuaries Institute93

Adrian Foley

130

Ahton de Silva, Emmauelle Walkowiak, Maria Yanotti, Sarah Sinclair, and Sveta Angelopoulos

125

AIA Australia

30

Alphacrucis University College (AC)133

Animal Medicines Australia

39

APSCo

202

Associate Profess Chris Wright100

Associated of Retired Principals of Technical Institutions

95

Association of Heads of Independent Schools of Australia (AHISA)

172

Ausfilm

48

Australasian Council of Deans of Arts, Social Sciences and Humanities (DASSH)

141

Australasian Railway Association (ARA)

65

Australian Academy of Science

200

Australian Academy of Technological Sciences and Engineering (ATSE)
Australian Aluminium Council
Australian Automobile Association (AAA)
Australian Bureau of Statistics (ABS)
Australian Chamber of Commerce and Industry (ACCI)
Australian Commission on Safety and Quality in Health Care (ACSQHC)

8, 89, 98131
6
12747, 175
9Australian Communications Consumer Action Network (ACCAN)

118

Australian Competition & Consumer Commission (ACCC)

72

Australian Constructors Association (ACA)

73, 105

Australian Council of Deans of Education Vocational Education Group (ACDEVEG)

116

Australian Council of Deans of Health Sciences (ACDHS)

153

Australian Digital Health Agency

145

Australian Digital Inclusion Alliance

96

Australian Education Union Federal Office21

Australian Energy Council (AEC)

161

Australian Healthcare and Hospitals Association (AHHA)
Australian HR Institute (AHRI)

27, 176
54

Australian Industry Group (Ai Group)43, 179

Australian Information Industry Association (AIIA)76, 180

Australian Institute of Company Directors

44

Australian Institute of Teaching and School Leadership (AITSL)

146

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Inquiry conduct and participantsParticipants
Australian Investment Council (AIC)
Australian Learning Lecture
Australian Local Government Association (ALGA)

Submission no.
63, 71, 83, 84, 135
124
61, 132

Australian Mobile Telecommunications Association (AMTA)

163

Australian Research Data Commons (ARDC)

164

Australian Skills Quality Authority (ASQA)

149

Australian Small Business and Family Enterprise Ombudsman (ASBFEO)
Australians for Northern Development & Economic Vision (ANDEV)Ben Blackburn Racing64, 165
3
74, 81

Beyond Blue

15

Bill Ranken

148Black Dog Institute24

BSA | The Software Alliance

134

Bupa

69

Business Council of Australia (BCA)
Business Excellence Australia

16, 18132, 136, 159

Career Development Association Australia (CDAA)

104

Catholic Health Australia

78

Centre for Independent Studies

42

Chemistry Australia Ltd

35

Christopher O’Donnell, Professor

40

Civic Contractors Federation

38

Commercial Radio Australia

12Complementary Medicines Australia & The NICM Health Research Institute – Joint

29

Consult Australia

28

Consumer Policy Research Centre (CPRC)

19, 115

Cooperative Research Australia (CRA)

194

Country Universities Centre

119

CPA Australia

94, 106

CSIRO

128

Customer Owned Banking Association (COBA)

62

David Wadley

178

Department of Finance123

Department of Infrastructure, Transport, Regional Development, Communications and the Arts

201

(DITRDCA)
Desmond Griffith

143

Digital Service Providers Australia New Zealand (DSPANZ)

18

105

Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Participants

Submission no.

Dr Ann Villiers

107

Dr Holly Randell-Moon

85

Dr Ian Cornford

150

Dr Tom Karmel

197

Early Learning and Care Council Australia; The Front Project and Australian Childcare

34

Alliance – Joint
eBay Australia and New Zealand

114

Electrical Trades Union of Australia (ETU)

103

Energy Skills Australia

99

Engineers Australia

85

eSafety Commissioner

87

Financial Services Council (FSC)

53

Financial Services Institute of Australasia (FINSIA)

68

Gary McLaren

137

Gemaker

13

Geoffrey Taperell

5

Global Sisters Limited

46

Graham Bary

11

GrainGrowers

193

Grattan Institute37

Grok Academy

185

Group of Eight187

GSK Australia

14

Hireup109

Independent Higher Education Australia (IHEA)

111, 120

Infrastructure Victoria

10

Innovative Research Universities (IRU)

177

Institution of Chemical Engineers (IChemE)

101

Insurance Council of Australia (ICA)

59, 203

Internet Association of Australia (IAA)168

IPA-Deakin SME Research Centre (IDSRC)

31

Isolated Children’s Parents Association of Australia Inc (ICPA)

156

JCSF Consulting Pty Ltd

97

Jenny Gordon, Dr

17John Dahlsen

1John O’Donnell

91

Kevin Cox

75

KPMG

106

60, 192

Inquiry conduct and participantsParticipants

Submission no.

La Trobe University

182

Large Format Retail Association (LFRA)

142

Local Government Elected Members Association Inc. (LGEMA)
Mable Technologies
Master Builders Australia (MBA)4
152
58, 190

Medicines Australia

126

Minerals Council of Australia (MCA)

55

Monash Q Project – Monash University

160

Monash University

184

MTC Australia

140

MYOB

198

National Electrical and Communications Association (NECA)

108

National Farmers’ Federation (NFF) and Regional, Rural and Remote Communications

167

Coalition (RRRCC)
National Rural Health Alliance110

National Tertiary Education Union (NTEU)36

NBN Co147

Office of the Australian Information Commissioner

173

Per Capita Australia

162

PEXA

82

Pfizer Australia

129

Phillip Hone

77

Primary Focus

56

Professor John Quiggin

102

Professor Julia Horne

169

Professors’ Nicholas Biddle and Matthew Gray

155

Property Council of Australia

49

Queensland Nurses and Midwives Union (QNMU)

41, 90Ray Johnson

117

Regional Development Australia Tasmania (RDAT)

189

Regional Universities Network (RUN)

154

Richard Caladine

113

Roads Australia

25

Roads Australia

151

Robert Wildermuth OAM

199

Ronald Jackson

171

Salesforce

80

Science and Technology Australia

188

Seer Data and Analytics

139

107

Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Participants

Submission no.

Self-Employed Australia (SEA)

170

Shopping Centre Council of Australia

45

Simon Kwok

138

Smartsat CRC

144

Tabcorp57

Tasmanian Government

196

Tasmanian Small Business Council (TSBC)

20

Teachers and Teaching Research Centre (TTRC)– University of Melbourne

122

Technology Council Australia

51

TechnologyOne

66, 79Telstra Corporation

174

Tenfold Australia

23

The Chamber of Minerals & Energy of Western Australia (CMEWA)

52

The Citizen’s Dividend Organisation

2

The Honourable Reg Hamilton

50

The Medical Technology Association of Australia (MTAA)33

The Pharmacy Guild of Australia
The Smith Family
Universities Australia (UA)67, 11226
70, 195

University of Melbourne

186

University of Melbourne Graduate Student Association (GSA)

158

University of Technology Sydney (UTS)92

Urban Taskforce

88

VETASSESS

157

Vocus Group Ltd

121

Volunteering Australia

22, 166

William Merrilees

7

WiseTech Global

191

Table A.3 – Consultations
Participants
ACT Government, Chief Minister, Treasury and Economic Development Directorate
Alastair Hick
American Chamber of Commerce In Australia
Australian Constructors Association (ACA)
Associate Professor Tim Higgins, The Australian National University

108Inquiry conduct and participantsParticipants
Associate Professor Wayne Geerling, Monash University
Atlassian
AusIndustry
Australian Banking Association
Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES)
Australian Bureau of Statistics (ABS)
Australian Council of Education Research (ACER)
Australian Digital and Telecommunications Industry Association (ADTIA)
Australian Digital Health Agency (ADHA)
Australian Education Research Organisation (AERO)
Australian Education Union
Australian Energy Market Operator (AEMO)
Australian Healthcare and Hospitals Association (AHHA)
Australian Human Resources Institute (AHRI)
Australian Information Industry Association (AII)
Australian Institute of Teaching and School Leadership
Australian Investment Council (AIC)
Australian Medical Association (AMA)
Australian Mobile Telecommunications Association (AMTA)
Australian Prudential Regulation Authority (APRA)
Australian Retailers Association (ARA)
Australian Skills Quality Authority (ASQA)
Australian Small Business and Family Enterprise Ombudsman (ASBFEO)
Australian Taxation Office (ATO)
Australian Technology Network of Universities (ATN)
Australian Tutoring Association
Bao Hoang
Business Council of Australia (BCA)
Calix
Canberra Goulburn Catholic Education Office
CarbonAbility
DoorDash
Dr Char-lee McLennan, QUT Business School
Charles Cornish, Tabula Rasa Health Care
Chartered Accountants Australia & New Zealand (CA ANZ)

109

Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Participants
Cicada Innovations
Claire Field & Associates
Climate Risk
Committee for Economic Development of Australia (CEDA)
Commonwealth Bank of Australia
Community Colleges Australia (CCA)
Consult Australia
Cooperative Research Centre (CRC)
Council of Small Business Organisations Australia (COSBOA)CSIRO Data 61
Curtin Research Centre
Deloitte Access Economics
Department of Agriculture, Water and the Environment
Department of Climate Change, Energy, the Environment and Water (DCCEEW)
Department of Education, Skills and Employment (DESE)
Department of Finance
Department of Foreign Affairs and Trade (DFAT)
Department of Employment and Workplace Relations (DEWR)
Department of Home Affairs
Department of Industry, Science and Resources (DISR)
Department of Industry, Science, Energy and Resources (DISER)
Department of Infrastructure, Transport, Regional Development, Communications and the Arts (DITRDCA)
Department of Prime Minister and Cabinet (PM&C)
Department of The Treasury
Digital Skills Organisation (DSO)
E61 Institute
Emeritus Professor Bruce Chapman AO, The Australian National University
Equinix
Education Services Australia
Evidence for Learning, Social Ventures Australia
Fair Work Commission
FinityGemaker
Grattan InstituteGroup of Eight (Go8)110Inquiry conduct and participantsParticipants
HireupHigher Education Research Group
Independent Pricing and Regulatory Tribunal NSW (IPART)Infrastructure Australia
Innovative Research University (IRU)
Interactive Games and Entertainment Association (IGEA)
IP Group Australia
John Howard, Howard Partners
Dr Kean-Seng Lim
Knowledge Commercialisation Australasia (KCA)
Learning First
Martin Bean CBEMelbourne Accelerator Program`
Microsoft
National Australia Bank
National Centre for Vocational Education Research (NCVER)
National Disability Insurance Agency (NDIA)
National Indigenous Australian Agency (NIAA)
National Skills Commission (NSC)
National Tertiary Education Union (NTEU)New South Wales Centre for Economic and Regional Development
New South Wales Department of Education
New South Wales Department of Premier & Cabinet
New South Wales Treasury
NT Department of Industry, Tourism and Trade
NT Department of the Chief Minister and Cabinet
NT Department of Treasury and Finance
Office of Industry Innovation and Science Australia
Office of the Chief Scientist
Peter Tulip
Professor Andrew Macintosh, ANU College of Law
Professor Andrew Norton, Practice of Higher Education Policy, Centre for Social Research and Method, Australian
National University
Professor Beth Webster, Centre for Transformative Innovation, Swinburne University of Technology
Professor Hugh Harley, School of Economics, University of Sydney

111Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Participants
Professor Peter Dawkins, Mitchell Institute for Education and Health Policy, Victoria University
Professor Richard Holden, UNSW Business School
Professor Stephen Parker, Centre for the Study of Higher Education, University of Melbourne
Professors Alistair Royse and Colin Royse, Ultrasound Education Group, University of Melbourne
Professors Michael Ward and Russell Smyth, Monash University
Queensland Department of Education
Queensland Department of Premier and Cabinet
Queensland Treasury
Regional Universities Network (RUN)
Reputex
Reserve Bank of Australia
Restaurant & Catering Australia (R&CA)
RollerRoyal Australian College of General Practitioners (RACGP)
Sally Thorpe
South Australia Department of Education
South Australia Department of Premier and Cabinet
South Australia Department of Treasury
South Australia Productivity Commission
Sarah Pilcher, Centre for Education and Training, Ai Group
SpeeDX
TAFE Directors Australia (TDA)
Tasmanian Department of Education
Tasmanian Department of Premier and Cabinet
Tasmanian Department of State Growth
Tasmanian Department of Treasury and Finance
Teach for Australia
Tech Council of Australia
Tech Policy Design Centre, Australian National University
Tertiary Education Quality and Standards Agency (TEQSA)
The Hon. Fiona Nash, Regional Education Commissioner
The Smith Family
Universities Australia (UA)University of Technology Sydney – Human Technology InstituteVictorian Department of Education

112

Inquiry conduct and participantsParticipantsVictorian Treasury
Western Australia Department of Education
Western Australia Department of Premier & Cabinet
Western Australia Department of Treasury
World Economic Forum (WEF)
Xero

Table A.4 – Roundtable details and participants
25 October 2022 – Tertiary education
Australian Industry Group (Ai Group)
Committee for Economic Development of Australia (CEDA)
Department of Education
Department of FinanceEmeritus Professor Bruce Chapman AO, College of Business and Economics, Australian National University
Grattan Institute
Independent Tertiary Education Council of Australia (ITECA)
National Centre for Student Equity in Australia
National Skills Commission (NSC)
National Tertiary Education Union (NTEU)
Professor Andrew Norton, College of Arts and Social Sciences, Australian National University
Professor Tom Karmel, Future of Employment and Skills research Centre, University of Adelaide
Regional Universities Network
TAFE Directors Australia
TEQSA
Victoria Department of Jobs, Precincts and Regions (DJPR)
27 October 2022 – Migration
Department of the Treasury
Department of Home Affairs
3 November 2022 – Digital, data and innovation
AtlassianAustralian National University (ANU) Tech Policy Design Centre
Australian Healthcare and Hospitals Association
Australian Retailers Association
Australian Small Business and Family Enterprise Ombudsman

113Volume 1 - 5-year Productivity Inquiry: Advancing Prosperity Inquiry report

Chartered Accountants Australia and New ZealandConsult Australia
Consumer Policy Research Centre
Digital Skills Organisation
e61 InstituteMicrosoft
Tech Council of Australia
TelstraUTS Human Technology InstituteXero
3 November 2022 – Modelling
Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES)
Centre of Policy Studies, Victoria University
Chris Murphy, Arndt-Corden Economics Department, Crawford School of Public Policy, Australian National University
Deloitte Access Economics
Department of the Treasury
Ernst & Young
George Verikios, Department of Accounting, Finance and Economics, Griffith University
Investment NSW
Sally Thorpe

Table A.5 – Public hearings
Melbourne – 7 November 2022
Transport Workers’ Union
Mable
Hireup
Pexa
Vocus
Gary McLaren
Community Colleges Australia
Melbourne – 8 November 2022
Australian Constructors Association
TechnologyOne
Group of Eight
88.io

114

Report no. 100 – 7 February 2023

5-year Productivity Inquiry:
Keys to growth
Inquiry report – volume 2i5-year Productivity Inquiry: Keys to growth Inquiry report

The Productivity Commission acknowledges the Traditional Owners ofCountry throughout Australia and their continuing connection to land,
waters and community. We pay our respects to their Cultures, Country
and Elders past and present.

The Productivity Commission
The Productivity Commission is the Australian Government’s independent research
and advisory body on a range of economic, social and environmental issues affecting
the welfare of Australians. Its role, expressed most simply, is to help governments
make better policies, in the long term interest of the Australian community.
The Commission’s independence is underpinned by an Act of Parliament. Its
processes and outputs are open to public scrutiny and are driven by concern for
the wellbeing of the community as a whole.
Further information on the Productivity Commission can be obtained from theCommission’s website (www.pc.gov.au).

© Commonwealth of Australia 2023

With the exception of the Commonwealth Coat of Arms and content supplied bythird parties, this copyright work is licensed under a Creative Commons Attribution
4.0 International licence. In essence, you are free to copy, communicate and adapt
the work, as long as you attribute the work to the Productivity Commission (but notin any way that suggests the Commission endorses you or your use) and abide by
the other licence terms. The licence can be viewed at:https://creativecommons.org/licenses/by/4.0.
The terms under which the Coat of Arms can be used are detailed at:www.pmc.gov.au/government/commonwealth-coat-arms.
Wherever a third party holds copyright in this material the copyright remains withthat party. Their permission may be required to use the material, please contact
them directly.
ISSN 1447-1337 (online)
ISSN 1447-1329 (print)
ISBN 978-1-74037-759-1 (set)ISBN 978-1-74037-761-4 (volume 2)
An appropriate reference for this publication is:
Productivity Commission 2023, 5-year Productivity Inquiry: Keys to growth,Vol. 2, Inquiry Report no. 100, Canberra
Publication enquiries:
Media, Publications and Web | phone 03 9653 2244 | email publications@pc.gov.au

ii

Contents

Contents
Prefaceiv

1.

Productivity growth and prosperity1

1.1

Productivity and prosperity go hand in hand1

1.2

A micro lens on productivity growth5

1.3

The aggregate picture

12

1.4

Productivity: what lies beyond the aggregates?

19

Forces shaping Australia’s productivity challenge

27

2.

2.1

Australia’s recent productivity performance

30

2.2

Forces shaping future productivity growth37

Appendix

59

A.

61

Productivity and how it is measured

Abbreviations

79

References

81

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iii

5-year Productivity Inquiry: Keys to growth Inquiry report

Preface
Productivity is the key to prosperity.
It is the process by which we learn how to get more from less: more and better products — new solutions tomeet human needs, produced with less hours of work, fewer resources and a lighter environmental impact.
In essence, productivity growth is about working smarter. The extraordinary rise in average living standards
over the past 200 years has come about through the ongoing discovery and spread of new, useful ideas. Some
took the form of new technology — like electricity or antibiotics. Others were new business models like mass
production or ride sharing. Still others were institutional innovations like accounting standards, capital markets
or free trade. Australia has not had to generate all these new ideas, but has benefited from its own ingenuity inraising productivity across the economy, and from diffusing, using and building on others’ inventiveness.
What will come next? What should we do to speed the pace of growth, or at least clear a path?
The current 5 year Productivity Inquiry tackles these questions. It builds on the work of the last review,
Shifting the Dial, released in 2017. It starts with this document, which lays out the context of our productivity
challenge: what we have learned from history, what we think is most salient about the present and where wemight therefore focus our policy effort.
A key message is that the path and pace of growth is necessarily uneven. Countless innovations have burst
onto the scene, radically transformed an industry or aspect of life, and then plateaued towards a new normal.
They have varied in their effect: some innovations made a product dramatically cheaper. Others improved
the quality of a good or service. Others came up with a good or service that was entirely new. And some did
a combination of all three. This unevenness extends to parts of the economy. Agriculture was completelytransformed in the twentieth century. Some service industries, by contrast, have seen less change. Notransformative change of the past was foreseeable ahead of time.
Productivity policy is about positioning rather than prediction. It involves a set of institutions and policy
settings that can foster innovation and can efficiently test, select and spread the best new ideas across the
economy. By this, the benefits of (uneven) progress can be widely shared.

Our current state
The unevenness of productivity growth — both in its causes and effects (cost, quality and novelty) — makes
it hard to measure. But the evidence suggests that like its global peers, Australia’s productivity growth has
slowed in the past two decades.
Recapturing the productivity growth rates of the past could yield large benefits in extra income alongside a
reduced working week.
But productivity faces some headwinds. One is the gradual but dramatic rise of a predominantly
services-based economy. Ironically, productivity growth in the production of goods has seen a shift of labourand other resources into services, which have risen to make up 80% of the economy. Many services aredelivered in person. Many are government funded and/or delivered. Often it has proven hard to automate
aspects of the service, or otherwise economise on the labour input. Hence productivity growth in mostservices has been slower than traditional sectors like agriculture, manufacturing and mining, where capitaliv

Preface

has replaced much labour and new technology has driven large gains in overall productivity. Moreover,globally, Australia ranks lower in service sector productivity than we do in the goods sector.
Slower productivity growth in services is a historical pattern. It need not be our future. New approaches, suchas digital technologies and the better use of data (through artificial intelligence, for example) hold great
promise for broadly based productivity gains, including in services.
This does not mean that we will ignore productivity enablers in traditional industries. Rather, the point is tobroaden the policy conversation about productivity to encompass the services sectors that now employ thebulk of the workforce.
The COVID-19 pandemic has forced the take up of technology, including online retail, telehealth and remotework. It forced new realities on the producers and consumers of services — the sector hardest hit bypandemic restrictions. The adaptations forced by the pandemic (including of government regulators) are now
opening new possibilities for future productivity growth, if we can grasp them.
But the pattern of productivity growth could look different in services. Perhaps quality improvements will be
more salient than cost reductions, making it even harder to accurately measure the gains. Service innovation
could be focused less on the invention of new technology and more on its use, particularly for a small open
economy like Australia. Getting value from university expertise could be as much about person-to-person
connections as commercialising academic intellectual property. A focus on service sector productivity forces
a rethink and subtle adjustment of many traditional policy tools.
Global forces are creating their own productivity headwinds. The need to decarbonise the economy is one.
Decarbonising represents an effort to reduce costs — specifically the cost of carbon emissions not hitherto
counted in firm profits or GDP. It will require global and local innovation, strong partnerships between the
public and private sector and significant new investment — partly to replace rather than add to the existing
capital stock. Australia’s success in meeting this challenge efficiently will be a key determinant of our overall
productivity performance in coming decades.
Heightened geopolitical tensions and supply chain disruptions also pose a challenge. Global trade andinvestment have been a great benefit to Australia as a small open economy. Building supply chain resilience(and redundancy) might be attractive to some firms, but will almost certainly increase costs, and prices facedby consumers. Any fragmentation of the multilateral rules-based order could crimp the benefits to Australia
from trade and investment flows.

vProductivity growth and prosperity

1.

Productivity growth andprosperity

Key points
Productivity growth — producing more outputs, with the same or fewer inputs — is the only sustainable
driver of increasing living standards over the long term. While economic growth based solely on
physical inputs cannot go on forever, human ingenuity is inexhaustible.
Sustained productivity growth is a relatively recent historical phenomenon. It has ensured that modern
life is richer in potentially every sense compared with any time in the past.
• Over the past 200 years, productivity growth has lifted hundreds of millions of people out of poverty and has
led to a dramatic increase in living standards for the vast majority of the world’s population.
• Technological developments and inventions — including vaccines, antibiotics and statins — have driven
huge increases in the quality and length of life over the past century.
The benefits of productivity growth come in the form of:• goods and services that cost less, in terms of number of hours employees need to work to afford them• goods and services whose quality improves over time
• completely new goods and services invented to improve everyday lives.
In practice, novel products, improved quality and reduced cost often blend together.
As goods and services become more affordable, people can work fewer hours and consume more; overthe past 120 years, the economic output of the average Australian is up 7-fold, while hours worked haveconsistently fallen.
While productivity growth is an imperfect measure of rising wellbeing, lifting the rate of productivity
growth is an essential element of any policy strategy aimed at increasing the collective welfare of theAustralian community. Productivity growth relaxes the constraints of scarcity and opens up
opportunities — for individuals, businesses and the general community.

1.1 Productivity and prosperity go hand in hand
One of the most startling facts in human history is the dramatic rise in living standards over the past two
centuries. This is despite the global population increasing almost 7-fold over that period. Just 200 years ago,
90% of the world’s population lived in a state of extreme poverty, compared with less than 10% today (figure
1.1 panel a). In Australia, economic output per person — a general measure of prosperity — is about 7 times

15-year Productivity Inquiry: Keys to growth Inquiry reporthigher than at Federation (122 years ago).1 This transformation is ultimately a function of human ingenuity: ofbeing more productive — working smarter not harder (figure 1.1 panel b).
Figure 1.1 – Productivity makes people better off
a. Extreme poverty has plummeted while populations

b. Australians are better off due to rising productivityb

soareda(index = 100 in 1901)
800

100

10

90

9

80
70

People in poverty(%, LHS)

Global population(billions, RHS)

700

8

600
500

6

50

5

400

40

4

300

30

3

20

2

10

1

200

1.2

1885

1950

Labourproductivity

700

600

7

60

0
1820

800

0
2015

Effect of labourutilisation

500

400
300
GDP per
capita100
01900 1918 1936 1954 1972 1990 2008

200
100
0

a. Extreme poverty is defined as an income lower than 2.15 USD per day (2017 prices, the equivalent of 1 USD in 1985
prices) (World Bank 2022a). b. The effect of labour utilisation is the difference in growth between GDP per capita andlabour productivity. Here this effect has been negative (decreased growth in GDP per capita) because the ratio of total
hours worked in the economy to total population has fallen due to falling average hours worked.
Source: Productivity Commission estimates using Bergeaud, Cette and Lecat (2016); Roser, Ortiz-Ospina and Giattino (2019).

But what has this meant in practice? It means that people alive today have the opportunity to access an array ofgoods and services that were unimaginable in the past. And access to these goods and services can transformpeople’s quality of life.
At the turn of the twentieth century, life was materially worse for the average Australian than it is today on
many dimensions.
• For every 10 000 newborn babies, more than 1000 died before they reached their first birthday, comparedwith just 3 in 10 000 today (ABS 2002; AIHW 2022).
• For those that survived childbirth, life expectancy was about 60 years, compared with more than 80 years
today. The invention of antibiotics, which largely eradicated infectious diseases such as cholera,
diphtheria, pneumonia, typhoid fever, plague, tuberculosis, typhus and syphilis, was decades away, andonly became a mainstream medicine from the 1950s (Adedeji 2016).
• During their 60 years of life, the average Australian worked much longer hours than today (the 48-hour
week was legislated in 1916); with little access to paid leave (paid annual leave was first introduced into

1 The picture is similar in other countries. In the United States, 95% of the increase in living standards over the past

70 years is attributable to growth in productivity. In China, 92% of the increase in living standards over the past 30 years
was attributable to productivity growth (Feenstra, Inklaar and Timmer 2015).
2

Productivity growth and prosperity

industry awards in 1935 (Fair Work Ombudsman 2022)); and they worked in a more dangerous workplace(Jansz and Gilbert 2017).
• The average Australian would also die before accessing the age pension, which was introduced in 1909
for men aged 65 years and over (ABS 1988). The average person could afford far fewer goods andservices for the wages earned (a steak would have cost the equivalent of 5% of a week’s wages (table 1
sources).
• Home life was more crowded (about 5 people per household in 1910 to less than 3 today in much larger
housing (AIFS 2017)) and much dirtier: automatic dishwashers and washing machines did not becomecommonplace in Australian households until at least the 1970s, and toilets were often located outside thehouse until as recently as the 1950s.
In many cases productivity growth by itself did not directly cause shorter working weeks, more holidays, andlonger, healthier lives — some of the beneficial changes that make life generally better today than in thepast. But productivity growth did enable those changes, by consistently freeing up small amounts of time andresources year after year, which could subsequently be reallocated to more valuable pursuits. Smallchanges add up: steady productivity growth has underpinned massive increases in living standards over the
longer run (box 1.1). Although in the short term, people can increase their incomes by working more hours(to increase production now) or consuming less and saving more (to produce more tomorrow), neither option
can increase living standards indefinitely.2 There are only so many hours in the day to work, and only somuch that can be saved from a given income.
Despite its pivotal role in driving prosperity, the precise causes of productivity growth are not universally
agreed or well understood (appendix A.2). Some combination of flexible and dynamic markets (where prices
determine the allocation of resources), institutional settings (including relatively stable government),
transparent property rights, access to resources (including finance), and the application of science andingenuity to production processes are likely key ingredients. What we are sure about is that productivity
growth is about learning to do more with the resources we already have — working smarter, not longer —investing in the latest technology and the best ideas (from domestic and international sources), whichbecome embodied in the things that we build and the ways that we organise and approach tasks.
Productivity growth is generally described in terms of a single, economy-wide aggregate — the percentagechange in GDP per hour worked. This measure is invaluable for understanding the rate at which productivity
changes, and for making comparisons over time and across different countries. But it can also obscure the realitythat underpins the aggregate: the disparate, uneven and unpredictable short-term movements — both up anddown over time and at different rates across the economy, reflecting actions taken by individual firms acrossdifferent industries — that ultimately lead to improvements in the production of individual goods and services.
A more ‘micro’ lens is a useful starting point for understanding Australia’s current productivity challenges andidentifying policy responses.

2 Technically, both options are, absent productivity growth, subject to diminishing marginal returns on additional capitaland labour inputs.
35-year Productivity Inquiry: Keys to growth Inquiry reportBox 1.1 – Consistent productivity growth is vital for prosperity
The dramatic rise in living standards over the past 200 years is not the historical norm. For most of
human history, the average person experienced virtually no growth in material prosperity. This is
illustrated for the United Kingdom — one of the only countries where long-term economic data isavailable — in the figure below (panel a), which illustrates the relationship between GDP per capita andproductivity. For many hundreds of years growth in per capita GDP was stagnant, consistent with
non-existent productivity growth.1 Starting in the early 1600s, productivity growth began and rapidly
accelerated, as the industrial revolution gathered pace and scope (Bouscasse, Nakamura andSteinsson 2021). Growth in per capita GDP, and increasing economic prosperity, followed.
Compounding of this growth is important: seemingly small productivity growth leads to large changes in
economic output over longer periods of time (panel b) — so policy changes that secure even small increases
in productivity growth matter. For example, in any economy, if productivity growth averages 2% per year,
other things equal, economic output per person will double in 35 years, triple in 55 years and increase by
more than 5-fold over 85 years — the life expectancy of an Australian born today. Conversely, if productivity
grows at a slower rate of 1% per year, economic output will take 70 years to double.
a. Productivity and GDP per capita in the United Kingdom b. Years to double per capita economic outputb
150

800

135
Productivity

Index (1260 = 1)

400

120
105
90

Average for theAustralian economy overthe 30 years to 2018-19c

75
200
GDP per capita

60
45
30

100

15
1600

0
0.5

50
1260 1360 1460 1560 1660 1760 1860

1
1.5
2
2.5
Annual productivity growth rate

3

a. Based on estimates of total factor productivity from Bouscasse et al. (2021). b. This chart shows for a hypotheticalcountry how long it would take for per capita economic output to double for various rates of productivity growth. It
assumes no change in labour utilisation rates (i.e. holding participation and hours worked constant), hence the rateof productivity growth is the sole determinant of the rate of economic growth. c. As reported in the 2021
Intergenerational Report (2021a).
Source: Broadberry et al (2012).
1.

Prior to the 1600s, productivity increases tended to lead to increases in the population and hence there was nochange in real living standards. This is known as the Malthusian trap.

4

Productivity growth and prosperity

Finding 2.1
Productivity is a recent phenomenon
Productivity growth is a recent historical phenomenon and over the past 200 years has led to massive
growth in living standards around the world.

1.2

A micro lens on productivity growth]

Output

]

Input

=

Productivity

EqualsAt the most elementary level, productivity describes the quantity of products that can be generated (output)
from the resources (inputs) used in the production processes.3
In reality, the change in productivity — productivity growth — reflects not only the quantity of goods andservices produced but also changes in their quality over time. It also reflects the invention and introduction ofentirely new products.
Hence, the growth in living standards experienced over the past 200 years can be seen as manifesting inthree main ways.
1. Goods and services that became cheaper — through a fall in the number of hours (‘labour cost’) ofworkers’ time needed to produce existing goods and services
2. Goods and services that got better — through improvements in quality on multiple dimensions (by anamount worth more than any additional resources required to improve them)
3. Entirely new goods and services — as new ways were found to satisfy human wants (or new wants
were discovered and developed) either through wholly novel products or new varieties of existing ones.
Different goods and services, and different parts of the economy, have experienced different combinations ofthese three effects. Some everyday items have become materially cheaper; others have become muchbetter; and many have done both. All the while, the introduction of new goods and services has
fundamentally re-shaped the economy.
… growth as we have known it has centrally involved the birth of new products and industries
and the decline and death of others, a perspective incompatible with thinking about andmeasuring growth simply as an aggregate phenomenon. (Nelson et al. 2018, p. 153)
In each of these three ways, productivity growth has increased the typical worker’s purchasing power — asmaller number of hours of work is required to achieve any particular level of material living standards (which
encompasses the quality, quantity and variety of goods and services).

3 More formally, productivity is defined as the ratio of some measure of output (goods and services after accounting forgoods supplied by others) to some measure of inputs (typically labour, machines, equipment, or the combination ofthese) for some unit of analysis (be it a single company, an industry within an economy, or an entire country).
55-year Productivity Inquiry: Keys to growth Inquiry report

Finding 2.2
The benefits of productivity
Productivity growth benefits the average Australian by increasing their purchasing power. The average
worker can consume more, better quality, and novel goods and services, while working fewer hours.

Things that get cheaper: lowering the labour cost of goods andservices
Productivity growth often involves finding ways to produce goods and services with fewer inputs. This in turnmeans that the goods and services become cheaper over time to purchase. One way to measure this is by
the number of hours the typical employee (receiving the average wage) needs to work in order to buy
particular goods and services. In fact, on this measure, the ‘labour cost’ of many everyday items has indeed
fallen consistently over time as productivity has improved (table 1.1).
For example, a double bed with a mattress, a blanket and pillows in Australia in 1901 cost the equivalent of
3 weeks of work at the average weekly wage, compared with 1 week in 1980, and just 2 days in 2021. Even
housing rental costs, which have risen in inflation-adjusted terms over the past 40 years, have fallen (onaverage, across the country) in terms of their labour time cost — the average person needed to work about
20 hours to rent a three-bedroom house in 1901, while in 2021 the same person would only need to work forabout 9 hours. A more dramatic example is the bicycle, which in 1901 would require several months of work
to afford but now requires less than a day of work.
Table 1.1 – Australians need to work fewer hours to afford most goods and servicesa,b
Hours of work to pay for goods and services
1901

1990

2000

2010

2019

Hours

Hours

Hours

Hours

Hours

Double bed, mattress, blanket and pillows

185

41

37

24

18

Bicycle

473

-

14

8

6

Rent

20

12

11

10

9

Theatre (minutes)

321

81

84

69

62

Loaf of bread (minutes)

18

5

6

6

4

Smartphone

-

-

-

60

16

Cars (new, months)

-

17

13

7

5

Good or service

a. Number of hours required to purchase good calculated by dividing the nominal price of each good/service by the averagenominal wage (inclusive of tax, bonuses and superannuation benefits). Nominal prices for all products (except smartphones
and cars) is known for 1901 and 2000 and for other years the price was extrapolated using the consumer price index seriescorresponding most closely with that product. Wages were calculated as labour compensation from the national accounts
divided by aggregate hours worked in the economy. For pre-1960 wages, the wage estimates for 1960 were backcasted using
a variety of data sources including the Long-term productivity database and Butlin. Nominal prices for smartphones and cars
come from 2021 and were extrapolated backwards using the consumer price index. b. For figures quoted in months, onemonth is taken to be 20 work days of 8 hours each.
Source: Productivity Commission estimates using ABS (Australian System of National Accounts, 2020-21 financial year,
Cat. no. 5204.0, table 1; Consumer Price Index, Australia, March 2022, Cat. no. 6401.0, table 7); Bradstock (2021);
Birot (2021); Butlin, Dixon and Lloyd (2015); Feenstra, Inklaar and Timmer (2015).

6

Productivity growth and prosperity

Even from this small sample, it is notable that different goods and services have fallen in cost by varying
amounts. The path of real cost reduction is neither smooth nor consistent, as might be implied by looking
only at aggregate percentage changes in labour productivity across the economy.
The loaf of bread became cheaper in part because of the complementary effects of innovation and capital
investments in agriculture. Innovations — such as the development of synthetic fertilisers, pesticides and newstrains of wheat — improved crop yields. These went hand-in-hand with complementary investments in more andbetter capital that allowed machinery (such as tractors and harvesters) to replace manual and animal labour.4
The bicycle became cheaper through improved manufacturing efficiency — cheaper energy, better materials
and mass production. The rise of global trade also made the bicycle cheaper to Australian consumers byallowing access to products that are more efficiently produced overseas. In contrast, the cost of housing —measured by rent — has seen a much less spectacular fall, because it has proven more difficult to adopt
technological innovations (as well as institutional and governance innovations) which would reduce the realcost of housing, including by getting the most out of available land.
Whether a product is a good or a service can influence how much cost reduction occurs. This can beillustrated by considering pairs of products — one a good and the other a service — that are used in similar
contexts (figure 1.2). Almost without exception, the prices of the good, from medical equipment to clothing
have risen more slowly (or declined) relative to the price of the similar service (this phenomenon is related to‘cost disease’ which will be discussed further in chapter 2).
Figure 1.2 – Price growth in services has outstripped goods
CPI index for various pairs of related services and goods (2000 = 100)a. All goods and services

b. Medical productsc. Clothing products

300

300

300

250

250

250

200

200

150

150

100

100

50
2000 2005 2010 2015 2020
1.4

50

200
Services
150
Goods
100

50
2000 2005 2010 2015 2020
1.3

2000 2005 2010 2015 2020

Source: ABS (Consumer Price Index, Australia, December 2021; Cat. No. 6401.0.; tables 7-8).

4 Mechanically interpreting contributions to productivity growth in terms of innovation (or multifactor productivity, MFP) on the

one hand — versus capital investment on the other — can potentially be misleading. This is because improvements in MFP
raise the productivity (and profitability) of capital, which in turn encourages further investment in capital such that the capital tolabour ratio increases. In addition, investment in new capital typically embodies the latest innovation. See appendix A.1 for amore detailed discussion.
7

5-year Productivity Inquiry: Keys to growth Inquiry reportCountries with higher productivity typically have a lower cost of living
A similar pattern can be observed across countries. Compared with people in countries that have lower
aggregate productivity, the average Australian works fewer hours to purchase the same goods, and viceversa (table 1.2). For example, in Mexico, where labour productivity is 66% lower than in Australia, theaverage worker would need to work about 4 times as long (420% longer) to afford food, compared with anAustralian earning the average wage. Indeed, among the items listed in table 1.2, not a single one is more
affordable for the average Mexican (in terms of hours worked) compared with the average Australian.
There are exceptions to this general finding. Compared with the United States, where labour productivity is
about 20% higher than in Australia, some goods and services, such as pharmaceuticals and medical
services are more expensive (90% and 19% respectively) in terms of average hours worked. These
outcomes can often be a function of specific government policy designed to alter the consumer prices ofcertain goods and services. For example, Australia’s Pharmaceuticals Benefit Scheme subsidises the cost of
selected drugs making them cheaper for consumers.
Table 1.2 – Relative labour cost of goods and services in different countriesa
Labour costs relative to Australia (percentage difference) by country in 2017
Good/service

Mexico419

New Zealand42

United States
-17

Bread

425

6

-30

Clothing and footwear

511

29

6

Actual rents for housing

173

21

-29

Electricity, gas and other fuels

224

29

-38

Pharmaceutical products

1331

90

90

Medical Services

178

-11

19

Motor cars

662

62

15

Education

1

-21

37

319

17

-16

Food (all)Catering services

a. Labour cost is the price of a good/service divided by the average wage (average annual employee earnings divided byaverage annual hours worked per employee). That is, the number of hours required to buy that particular good or service.
Source: Productivity Commission estimates using OECD (2022b) and unpublished data from the World BankInternational Comparisons program (2017 release).

Things that get better: improving the quality of goods and services
Many of the benefits accruing from productivity growth come in the form of improved quality of existingproducts (figure 1.3). Postal services are faster today, as are almost all communication mediums, including
mobile phone networks and the internet, and the quality of the services (e.g. in terms of network reliability) ismuch higher. Entertainment, such as music and television, is available on a wide variety of mediums, making
it more accessible to more people. And health services are available to treat a wider variety of ailments andillnesses with much higher diagnostic precision (more on this below). Goods, such as cars (safer, more
powerful, more fuel efficient, more automated); computers (faster and smaller); and homes are all now builtwith better quality materials with greater functionality and more features than they had in the past.

8

Productivity growth and prosperity

Each of the quality factors discussed above are ultimately reflected in the prices of each product. But
because the price of a product is not typically broken down to reveal the contribution of quality and otherchanges in attributes, this makes it difficult to directly assess the benefits of productivity growth. The benefitsof productivity growth for improved quality can, however, be determined by comparing the quality-adjusted
and non-adjusted change in the price of a product over time.
Figure 1.3 – Then and now

Ford Model T (1908)

1.6

VS

Tesla Model 3 (2022)

1.7
20hp crank started
Internal combustion

1.5

Engine283hp electric~70km/hTop speed34-64 km

Range

600km

no seat belts

Safetyseat belts, air bags,
automatic braking and computer aided
collision avoidance systems

Paper maps

Navigation

GPS navigation on aninternal touch screen

Sprung Leather seats stuffedwith horsehair and cotton

ComfortHeated seats and steering wheel
and 13 speaker audio system

Apple PowerBook 100 (1991)>250km/h

1.9VSApple MacBook Air (2022)
1.10

9 inch monochrome(1 colour) 640 x 400 pixels

Screen13.3 inch touch screen,
millions of colours, 2560 x 1600 pixels

Lead acid battery
with <4 hours

Battery

Lithium polymer
up to 18 hours

2.3kg

Weight

1.3kg

up to 40
megabytes

Storage

1TB (25,000
times larger)

Plastic

Material

Aluminium

serialmodem

Communication

Single speaker

Sound

WiFI, Bluetooth and built inhigh definition camera
Stereo speakers & headphone jack

1.8
Source: Information on Apple Powerbook 100 and Macbook Air: Apple (2022) and Wikipedia (2022); Information on Ford
Model T and Tesla: anon (2017), Alvarez (2007) and Tesla (2022).

The cost of constructing a house (excluding the land) is illustrative (figure 1.4). Between 1988 and 2020, thelabour cost of constructing a new house increased from 5610 hours of work for the average worker to 7925
hours. That is, housing became more expensive. But this was entirely driven by the increasing size (floorarea, 1796 hours) and quality (1160 hours) of the average detached house. In fact, the labour cost ofbuilding a house in 2020 of identical size and quality to a 1988 house actually fell by 641 hours — or about95-year Productivity Inquiry: Keys to growth Inquiry report

11%. Put differently, the typical worker in 2020 wanting to construct a house of the same size and quality
typical in 1988 would find it more affordable (641 fewer hours of work time). And most houses now cost morethan they did in 1988 because modern detached houses are typically larger and of higher quality.
Figure 1.4 – Houses are costlier to build today because they are bigger and bettera
Price, size and quality contributions to the labour cost of constructing a new house in 1988
compared with 2020
9000

8000

Labour cost (hours)

7925

Quality2020 labour cost

1796

7000
6000

1160

5610

-641

1988 labour cost

Pure inflation

5000
4000

3000
2000
1000
0
Floor area

a. The quality effect is the difference in the growth of the average cost of constructing a new house and the implicit pricedeflator used by the ABS to derive chain volume estimates of construction activity.
Source: Productivity Commission estimates using ABS (Building Activity, Australia, various releases, Cat. no. 8752.0.);
Feenstra, Inklaar and Timmer (2015).

Entirely new things: increasing the variety of goods and services
Productivity improvements also come in the form of novel products, which contribute to an increase in productvariety. A notable example is the introduction of electric sources of light. When this service was first introduced,
the market price of electric lighting was similar to gas. But the light produced was brighter, creating substantial
additional benefits (e.g. fewer accidents in factories) without requiring additional resources.
A more recent example is the rapid improvement in communication technology: between 1983, when mobile
phones were first introduced, to 2007, when the first ‘smartphone’ (the iPhone) was introduced, mobile
phones evolved from being brick-like devices that could be used for making wireless phone calls (itself asignificant breakthrough), to small hand held computers with complete access to the internet, bundling abroad range of functions including telephony and photography.
Smartphones are now ubiquitous around the world — there are more people with a smartphone than with aflushing toilet.5 This ubiquity tends to understate the immense economic value of the novelty (including its
mobility and versatility) of the smartphone. It has been estimated that to create the equivalent computing

5 In 2018, about 67% of the global population (5.095 billion out of 7.602 billion) own a smartphone while in 2018 about

60% of global population did not have a toilet to safely manage human waste at home (Statistica 2022; UNICEF 2018;
World Bank 2022b).
10

Productivity growth and prosperity

power contained in an iPhone X in 1957 (using vacuum tubes) would have cost roughly one and a half times
2017’s global GDP (or 14 times the global GDP in 1957), required 100 billion square metres of floor space (afactory 50% larger than Tasmania) and consumed about 30 times the global electricity generation capacity at
the time (Delong 2017).
The smartphone showcases how novel products, improved quality and reduced cost often occur
simultaneously. In addition to the novelty of the smartphone, it also indirectly reduces cost by replacing a
range of other items for many people: cameras, torches, stereos, telephone books and calculators.
Overall, the volume of new and improved goods (and increases in their variety) introduced into the market
each year is enormous. For example, more than 50% of online transactions between 2014 and 2017 werepurchases of products that did not exist in the previous year (Goolsbee and Klenow 2018).

The benefits of new and better products are larger than we might think
The size and nature of the benefits of novel and improved quality products are difficult to measure and are
typically underestimated (box 1.2 and appendix A.3 and A.4). Whilst these measurement problems havealways been present, it is unclear whether they have worsened or improved in recent decades and hence it
is also unclear whether the consumer welfare gain associated with recent innovations (often involving ICT
products and the internet) has been larger or smaller than other past breakthroughs (such as electricity or
refrigerators) (Gordon 2018; Mokyr 2018).

Box 1.2 – Examples of mismeasuring the benefits of new products: statins and free
digital goods
To measure the benefit of new products accurately, we would need to know how much people would
have hypothetically paid for the new product before it existed. Similarly, for products whose quality (orvariety) has improved, we would need to know how much a consumer would have been willing to pay forthe quality improvement, or for greater variety of choice.
These measurement issues can be illustrated with reference to the productivity benefits associated with
the ICT revolution such as smartphones, discussed above, and ‘free online goods and services’ such associal media and map apps. The benefits of free goods and services are likely undermeasured because
while they create significant value for consumers, there is no price with which to weight them and theadvertising revenue they generate likely also understates their value. Brynjolfsson et al. (2019) recently
developed a method to estimate the value created by these services and found that the existence ofFacebook alone would, if properly incorporated into GDP measurement, add about 0.05-0.11 percentage
points to annual GDP growth. Including the gains to consumer welfare from cameras on smartphones
adds another 0.62 percentage points to annual growth in GDP (between 2008 and 2017). Even if theseestimates are optimistic, they do point to the real consumer benefits that have accrued from the ICT
revolution that are often undermeasured in productivity statistics.

Medical improvements over the past century provide some notable examples of novel products that haveprovided large benefits to society (Feldstein 2017). One contemporary instance is statins (others are
vaccines and antibiotics), which were trialled in 1994 as a cholesterol reducing medication, and are today themost prescribed medication among Australians aged 65 and over to treat cardiovascular disease (in 2016
44% of this age group were prescribed statins (Ofori-Asenso et al. 2018)). The benefits of statin use to11

5-year Productivity Inquiry: Keys to growth Inquiry reportindividuals and society are large. They accrue in the form of, for example, additional years of life andearnings by lowering morbidity rates, heart attacks, strokes and related hospitalisations.
More generally, mismeasurement of the benefits of novel and improved quality products may mean that real
wages growth has actually been higher than its measured rate.

Advantages of the micro lensSeeing productivity growth through a micro lens — as existing goods and services that get cheaper andbetter through time and new products that come into being — has several advantages.
First, a micro lens demonstrates that productivity growth manifests differently in different parts of the economy. Somegoods and services (including many manufactured products) have become dramatically cheaper over time (such as
through productivity improvements in their source country). Others (such as health care) have primarily improved inquality rather than cost. Other goods and services have not improved as much along either dimension.
Second (and relatedly), a micro lens reminds us that the proximate causes of productivity growth, such as specificinnovations and technological discoveries, operate in uneven and unpredictable ways — both across the
economy and through time. There are observed waves of technological progress in enabling areas such asenergy, transport or communications, with rapid take-up often followed by a levelling off at high rates of adoption.
Some innovations have broad application (so-called ‘general purpose technologies’), such as the take up ofelectricity, computers or the internet; others have more specific application to an individual industry. The
implications for rates of productivity growth across and within different sectors of the economy vary considerably.
Third, a micro lens demonstrates that the benefit of productivity growth is not merely about having more
‘stuff’ — that is, cheaper and more plentiful supplies of the existing suite of goods and services. Much of thedividend from productivity growth comes in the form of better or entirely new goods and services, often
satisfying new or previously unaddressed human needs.
Fourth, a micro lens illustrates that the analysis of productivity growth need not be confined to that which ismeasurable or included in an aggregate such as GDP. Productivity growth can improve lives on multiple
dimensions wherever innovation can reduce the inputs required to achieve a desired outcome. The rightpolicies and institutions can encourage productivity growth in non-market sectors (where it may not bereflected in GDP statistics), for example.
Nonetheless, there are important insights to be gained from taking all these disparate instances of productivity
growth and combining them into a statistical aggregate, such as GDP per hour worked. For all their imperfections,these aggregate measures do tell us something about relative progress through time and across countries.

1.3

The aggregate picture

Despite the uneven sources of productivity growth, the benefits tend to be widely distributed across the
economy in the long term, flowing to business owners, workers and ultimately, consumers.

Being more productive enables increases in real wages
In terms of wages, growth in labour productivity — the broadest measure of productivity, which measures thenumber of hours required to produce a unit of economic output (GDP) — is very strongly correlated with thelong-term growth in real wages received by the average worker (figure 1.5). In the short to medium term,
factors such as relative bargaining power and economic shocks, such as large movements in the terms oftrade, can lead to deviations in the relationship between real wages and productivity — for example, in the12

Productivity growth and prosperity

1970s when growth in wages outstripped labour productivity (leading to an expansion in the labour income
share) and conversely over the past decade when the opposite occurred (box 1.3). But in the long run,almost all increases in real wages are due to labour productivity improvements.
Figure 1.5 – In the long run, wage increases are driven almost entirely by productivity
growtha,b,c
Australian average hourly real wages and labour productivity, 1959-60 to 2021-22 (indices,
1960 = 100)
350

Index (1960 = 100)

300

250

200

150

100
1960

1970

1980

Labour productivity

1990
Consumer wages

2000

2010

2020

Producer wages

a. Due to data limitations, the wage data are constructed using total labour compensation per hour only, without labour
income from owner operators, which was not available back to 1960. Hours data (used to calculate both labour
productivity and wages) prior to 1975 have been sourced from the Penn World Tables. b. Consumer wages arecalculated by deflating nominal average hourly wages by the consumer price index, producer wages are calculated by
deflating nominal average hourly wages by the GDP deflator, while labour productivity is calculated by deflating nominal
GDP per hour by the GDP deflator. c. Total hours (which includes employees and owner operators) are used to calculate
average wages, not just employee hours. Even if estimates for employee hours were available back to 1960, it isnecessary to use total hours in both the wage and labour productivity calculations for the purposes of, for example,
analysing changes in income shares (these issues will be explored in a forthcoming PC research paper). It should be
noted, however, that constructing real wage measures that include labour income from owner operators using the moredetailed data available for the period after 1995 shows almost identical movements to the data series shown in this chart.
Source: Productivity Commission estimates using ABS (Australian System of National Accounts, 2020-21 financial year,
Cat. No. 5204.0, tables 1,16, 46; Consumer Price Index, Australia, December 2021, table 1, Cat. No. 6401.0); Feenstra,
Inklaar and Timmer (2015).

13

5-year Productivity Inquiry: Keys to growth Inquiry reportBox 1.3 – Why might the rate of real wages growth diverge from productivity growth?
Over the long run, real wages are almost entirely driven by productivity. However, over the short andmedium term, changes in, for example, the terms of trade and utilisation rates in the labour force, cantemporarily cause a divergence between wages and productivity growth (figure).
With respect to the terms of trade, when global demand is particularly strong for Australian commodities, ourexport prices — and our terms of trade — tend to rise. A rising terms of trade generally causes measures ofreal income to rise with them. Indeed, in the most recent mining investment boom (roughly 2001-02 to
2011-12), real wages in Australia increased at about twice the rate of growth of labour productivity and grossnational income (GNI) per capita increased almost three times as much as labour productivity.
Changes in labour utilisation (which measures the effect of labour force participation, unemployment andaverage working hours) have also contributed to increases in real incomes during certain periods.
Structural changes in the Australian economy beginning in the 1960s led to rising labour force utilisation
as the share of women (and later, also the average number of hours they worked) in the labour force
increased. On average, this contributed about 0.5 percentage points to annual growth in GNI per capita
over the decade. However, across the past 60 years, increasing labour utilisation has contributed less than
0.1 percentage points to annual growth in the same measure (figure).
However, in the long run, the magnitude of the income effects pales in comparison to the much larger
effect of sustained productivity growth. For example, even if the gains to national income from the termsof trade since 2000 (which added about 23% to gross national incomes) are sustained permanently, thiscontribution would still be outweighed by the 33% increase to incomes accruing from labour productivity
growth over the same period.
Terms of trade booms and increasing participation drive only temporary changes toreal growth in average national incomesa,b
3.5

Percentage point contribution

3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5

1960 to 1970 1970 to 1980 1980 to 1990 1990 to 2000 2000 to 2010 2010 to 2020
Labour productivity

Labour utilisation

Terms of trade

Net foreign income

GNI per capita

a. Real wages are defined as labour compensation per hour (using Penn World Tables for hours pre-1980) but
excludes the income of the self-employed. b. Real wages have been deflated by CPI while GNI per capita andlabour productivity were deflated by the implicit GDP deflator.

14

Productivity growth and prosperity

What determines who — business owners, workers or consumers — receives the benefits from productivity
growth over time is complex, particularly in a modern economy where the distinction between these groups
can be somewhat artificial (e.g. a worker can be an employer and a shareholder in a business, as well as aconsumer). With respect to wages, at least in the near term, factors such as the relative bargaining power
between business owners and employees, and the institutional and regulatory settings that govern theseinteractions, are important.
The extent to which the gains from productivity growth are passed on to consumers (through lower prices) isa function of market structures, both in input and output markets. This includes the extent of barriers tomarket entry and the degree of competition, which determines the markup that businesses can charge for
their products. Again, the distribution of gains can also be affected by institutional settings — such as
legislation affecting how businesses compete (competition policy) and how much of the profits frominnovation they can capture (this includes intellectual property rights legislation, and subsides or taxes
designed to alter relative prices, and therefore consumption).
Finding 2.3
Productivity necessary for long run wage increases
Almost all sustained increases in real wages are underpinned by improvements in labour productivity growth.

Being more productive enables greater consumption
A consequence of productivity growth lowering the labour cost of most goods and services is the potential forhigher consumption of almost everything. The average Australian now consumes about 3 times more thanthey did in 1960, across almost every category of goods and services (figure 1.6).
Much of these increases in consumption have come through quality improvements rather than quantity.6 As
illustrated above for cars and laptop computers, typically consumer products have significantly improved in quality
and variety. These quality improvements — because they provide substantial benefits to consumers — aremeasured as higher levels of consumption, even where the physical number of products consumed is the same.
But again, there are exceptions to this finding, which can be the outcome from government policy. For example,
the falls per person in consumption of cigarettes likely reflect attempts at both moral suasion (e.g. negative
advertising campaigns) and the use of ‘sin taxes’ (which, by pushing up consumer prices of cigarettes, puts
downward pressure on their consumption) by governments seeking to reduce the incidence of smoking.

6 The net change in consumption is the result of changes in three factors: the quantity of a product consumed, changes

in the mix of products consumed (buying more high value products) and changes in the quality of products consumed.
15

5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 1.6 – Australian household consumption has increased for almost everything
Real household consumption per person (1960 = 100, right hand axis unless noted)
8,100

Vehicles

500

4200

2,700

Communications (lhs)400

Housinga
900

300
Energyb

Total consumption

Clothes

Transport

Alcohol
Cafesc

300

200

Food
100

100

Cigarettes
33
1960

0
1980

2000

2019

a. Housing consists of actual rents and imputed rents for owner occupiers and maintenance of dwellings. b. Includes
electricity, gas and other fuel. c. Includes hotels and restaurants.
Source: Productivity Commission estimates using ABS (2021, Australian System of National Accounts, 2020-21 financial
year, Cat. no. 5204.0, tables 1 and 42).

Finding 2.4
Productivity is also about quality and novelty
Being more productive means that the average Australian can consume more higher quality andcompletely new goods and services.

Being more productive enables more leisure
Productivity growth can also enable Australians to reduce their hours spent working (at least in a paid
capacity). And most importantly — because of increased purchasing power (the amount of goods andservices that can be purchased from income earned) — Australians can actually work fewer hours and still
be at least as well off in terms of how much they can consume. While not all reductions in hours are due to
productivity growth (the tax system also affects hours worked, for example), it enables people to work lessand consume more (box 1.4). This has been the lived experience of the average Australian (and much of theworld) over the past 120 years (figure 1.7).
Since 1900, aggregate labour productivity has increased by more than 700%, underpinning a similarly large
increase in economic output per person (650% between 1901 and 2018, figure 1.1 panel b) and facilitating a16

Productivity growth and prosperity

significant reduction in average hours in paid work, which fell by about 30% or 13 hours in line with legislated
reductions in the length of the working week and annual leave provisions (figure 1.7).7
Figure 1.7 – Productivity growth supports higher economic output with less work

Index (1900 = 100)700

48 hour week

40 Hour week

38 Hour week

(1916)(1948)(1988)

48
46

600

44
Average hoursb (rhs)

500

42

400

40

300

38
Productivitya (lhs)

200

36

100
0
1900

1915

2 wks annual
leave (1945)

3 wks

4 wks

(1963)(1973)

1930

1960

1945

34

Hours per week per worker

800

32
1975

1990

2005

2020

a. GDP per capita is expressed in $US2011. b. Prior to 1950 the data is reported on an intermittent basis and shows fulltime hours for production workers only. From 1950 the data is reported annually, for all workers.
Source: Bergeaud, Cette and Lecat (2017); Denniss (2003); Irvine (2021); National Museum of Australia (2022); Roser,
Ortiz-Ospina and Giattino (2020).

Finding 2.5
Productivity enables leisureBeing more productive means that the average Australian can spend fewer hours at work to achieve agiven level of consumption if they choose to.

Box 1.4 – Productivity growth makes it possible to consume more and work less

The decreased hours of work and increased income that result from productivity growth can be thought ofas a ‘productivity dividend’. One way to illustrate these benefits of productivity growth is to think about thetrade-off that it implies for the average worker between hours spent working on the one hand, andconsumption possibilities, on the other. As discussed, productivity growth leads to higher real wages andlower real prices, which means that the average worker can choose to:

7 More recently average working hours have fallen due to a combination of increases in part-time work — primarily womenentering paid work on part time hours — and a decrease in full-time work — principally men who were working full-time leaving
the labour force (Lattimore 2007, ABS 2022c). However, overall, the average working hours per employee of both genders has
fallen over the period 1978 to 2022, although the fall is more pronounced for male workers (ABS 2022c).
175-year Productivity Inquiry: Keys to growth Inquiry reportBox 1.4 – Productivity growth makes it possible to consume more and work less
1. work the same and consume more (the whole dividend is used to increase consumption)
2. work less and consume the same (the whole dividend is used to reduce work)
3. some combination of the above including working less and consuming more (the dividend is divided
between less work and more consumption).
In practice, Australians have (looking collectively) implicitly ‘chosen’ the third option. The outcome of thischoice, in terms of work and income, is illustrated in the figures below. The solid line in panel a shows thatsince 1980, Australians have used their productivity dividend to reduce their average hours worked by about
10%. Over the same period, real incomes (as proxied by growth in real GDP per capita) more than doubled(solid line in panel b). The dashed line in panel a illustrates option 2. If Australians had been content with a
1980s standard of living they could have reduced their average hours by 76% (28 hours per week) and real
incomes would have stayed the same. In other words, Australians used about 13% of the productivity
dividend to ‘purchase’ leisure. The dashed line in panel b illustrates option 1 and shows that if there had
been no reduction in hours worked (assuming that actual labour productivity outcomes prevailed) incomes
would have increased by an additional 22 percentage points since 1980.
a. Actual vs potential change in hours worked perb. Actual vs potential income (GDP per capita)

week to maintain GDP per capita at 1980agrowth since 1980a (index 1980=100)

10

10Actual reduction in hours

0

0

-10

-10
Higher real incomes

-20

240

240

No reduction inhours worked

220

200

200

180

180

160

160

140

140

-20

-30

-30
Potential reduction
in hours to maintainliving standards

-40

-50

-40

-50

-60
Lower real incomes

-70
-80
1980

1990

2000

2010

2020

-60

120

-70

100

-80

80
1980

Actual outcome

120
100

1990

2000

a. GDP measured at chained PPPs in million 2017US$ using data from 2019.
Source: Productivity Commission estimates using the Penn World Tables (eleventh edition).

18

220

2010

80
2020

Productivity growth and prosperity

1.4

Productivity: what lies beyond the aggregates?

Aggregate measures of productivity growth provide a useful approximation of the rate of economic progress,
including the trade-off between consumption and work. But the micro lens illustrates the richness and variety
in the way economic progress unfolds in the real world. And there are other aspects of community wellbeingthat the macro aggregates can miss (although in many cases these tend to be positively correlated withproductivity growth).
In practice, community wellbeing can be imperfectly represented by aggregate measures such as income percapita or GDP per hour worked. Three commonly cited areas in which these economic aggregates fall short are:• equity: are the fruits of rising productivity being evenly shared across all groups and individuals?
• the natural environment: are we adequately counting the impact of environmental degradation, carbon
emissions or the depletion of natural resources?
• life satisfaction: do higher incomes necessarily make us happier?

How well does Australia spread the gains of productivity growth?
Historically, consumers have received outsized benefits from productivity growth. For example, analysis of
the US market (Nordhaus 2004) showed that about 98% of the value generated by the production of novel
goods and services between 1948 and 2001 accrued to consumers, as opposed to entrepreneurs andbusiness owners.8
In many other respects, the fruits of productivity growth (such as quality improvements and lower prices)
inherently benefit everyone regardless of income (as discussed, technological advances tend to become
embedded in new and existing goods and services, improvements in medical services — which benefit allAustralians in the form of subsidised access to medical care — is one such example).9 That said, a focus on
average outcomes can mask the actual lived experience of some Australians. In this case, redistributive
policies, including provision of a robust safety net, play a role in ensuring that the benefits of productivity
growth are widely distributed. And productivity growth, by growing the pie, allows governments, via the tax
and transfer system, to reinforce that safety net (box 1.5). Indeed, over the longer term, providing a moregenerous social safety net and delivering the government services that many Australians rely upon would not
be possible without robust productivity growth.
Over the past three decades, real income growth of the lowest income groups has been only slightly below
the average (figure 1.8 panel a). Inequality in income (and consumption) has increased only modestly inAustralia since the late-1980s and measures of income poverty have tended to fall, significantly so in thecase of absolute poverty over the past two decades (figure 1.8 panel b and c).

8 Nordhaus (2004) estimated the social value of technological advances and the amount that was captured by producers

and consumers. The typical rate of return on capital in the United States between 1948 and 2001 was about 5.9%, which
is very close to the cost of capital (Nordhaus 2004, p. 35), indicating that most firms typically do not capture profits above
the cost of capital.
9 In absolute terms, even if the nominal income of Australians does not change, real incomes will likely rise due to lower
prices, higher quality and the invention of new products — in this way the benefits are broadly distributed. In a relative
sense, low income Australians may have benefited by proportionately more than the average to the extent that they
spend a higher share of their incomes on non-discretionary items, such as food, whose price has fallen dramatically inline with agricultural productivity improvements, amongst other things.
19

5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 1.8 – Productivity growth has not exacerbated inequality and, it has been
associated with rapidly declining absolute poverty rates
a. Growth in average annual realb. Ratios of equivalised disposablec. Share of population in income

incomes by decilea (1988-89 toincomebpovertyc (per cent)2015-16) (per cent)3

5

5P90/P10

4

14
12

4

2

10
3

Relative poverty

3

8
P50/P101

Bottom
2
3
4
5
6
7
8
9
Top

0

Income decile

2

2

1

1

6
4
Absolute poverty
201988891997982006070201516

0
2001

2007

2013

2019

a. Income is deflated by CPI. b. Equivalised measures of income adjust for household size and composition. c. Relative
poverty is defined as household equivalised income that is less than 50% of the median household equivalised income.
Absolute poverty is based on an income poverty threshold whose real value is held constant over time. In this case,equivalent to the relative poverty threshold in 2001.
Source: Panel a & b: Productivity Commission estimates using ABS (Microdata: Household Expenditure, Income andHousing, 2015-16, Cat. no. 6540.0, released 25/10/17) and ABS (Household Expenditure Survey Basic confidentialised
unit record file for 1988-89 as available at 25/10/17). Panel c: Wilkins et al. (2020).

Box 1.5 – Well targeted redistribution by governments significantly reduces
inequality in Australia
While income inequality has remained steady over the past few decades, Australia’s progressive tax andhighly targeted transfer systems substantially reduce the level of inequality at a given point in time. For
example, an often-used measure of income inequality, known as the Gini index (which rises as income
inequality increases) reduces consistently as government transfers (such as unemployment benefits andrent assistance) and income taxes are applied to private incomes. Similarly, the Gini index for final
consumption, which includes in-kind government transfers such as health, education and social housing,is lower than both final consumption, which in turn is lower than for disposable income (which likely
reflects access to finance and savings behaviour). In effect, government policy has meant that while anindividual’s (or a household’s) income from work and investments can be volatile over time, their actual
spending on goods and services is usually much more stable. This indicates that redistribution, while
imperfect, does act as a form of insurance against income shocks.

20

Productivity growth and prosperity

Box 1.5 – Well targeted redistribution by governments significantly reduces
inequality in Australia

0.4

Effect of Gov. transfers

0.3

Gross income

Effect of income tax

Disposable income
0.2
0.1
0
1989

1994 1999 2004 2010
Financial year ending

2016

0.4

0.35

Private consumption
more equal than
Disposable income
disposable income

0.3

Gini coefficient

Private income

0.5

More equal

More equal Gini coefficent Less equal

0.6Less equal

The impact of redistribution on measures of inequalitya,bPrivate consumption

0.25
0.2

0.15

Equalising effect Final consumptionof in-kind transfers

0.1
0.05
0
1989

1994 1999 2004 2010
Financial year ending

2016

a. The Gini index is a measure of inequality ranging from 0 (completely unequal) to 1 (perfectly equal) that is
calculated by comparing the actual cumulative proportional distribution of income to the counterfactual cumulative
distribution if the society was completely equal. b. Private income refers to income before tax and transfers,
disposable income is income after taxes and transfers and final consumption is private consumption plus in-kindservice received for health and education.
Source: PC (2018, pp. 54, 65).

Finding 2.6
Productivity and the safety net
Consumers have received large benefits from productivity growth, including the capacity to benefit from a
broad government social safety net.

Accounting for environmental impacts
As with any manifestation of progress in the economy, productivity growth can give rise to either negative or
positive environmental outcomes associated with the destruction, or preservation (respectively), of naturalland and water resources.
Creating more and higher quality goods and services from the use of fewer inputs can lessen the use of
scarce natural resources and reduce adverse environmental impacts, as well as returning more leisure timeto people to enjoy environmental assets.

21

5-year Productivity Inquiry: Keys to growth Inquiry report

If there are no markets to provide an indication of how different environmental outcomes are valued, or
regulations to influence behaviour to achieve environmental outcomes valued by the community, then thiscan mean there are environmental consequences of productivity growth that detract from people’s wellbeing.
Input and output prices are the fundamental market signals that help businesses allocate resources to the
production of goods and services, and (in the case of output prices) provide information to consumers tomake consumption choices.
When prices are incomplete (because the prices for certain inputs and outputs are themselves missing,typically because of an absence of property rights, markets, regulation or information), market participants willtend to over or under produce certain outputs, relative to levels which maximise the community’s well-being.10
Missing prices tend to plague the use of ‘common-property’ natural resources, such as the Earth’s atmosphere.
• In the 1980s the production of chlorofluorocarbons (CFCs) — a chemical used in fridges, air conditioners
and aerosols — was found to be destroying a part of the Earth’s stratosphere known as the ozone layer. A
depleted ozone layer leads to an increase in ultraviolet light reaching the earth from the sun, which tends
to increase the rate of skin cancers and cataracts in humans, as well as being deleterious to marine andterrestrial ecosystems. This damage was not reflected in the price of products (nor initially in non-priceregulations) that contained CFCs.
• A scientific consensus was reached in the 1990s that greenhouse gas emissions associated with the
production of fossil fuel-based energy (burning coal or gas in power plants and petrol in cars) were
influencing the climate, leading to, amongst other things, more frequent and more destructive weather
events. This damage was also not reflected in the price of products that directly or indirectly used fossil fuels.
In both of these cases, damage is caused, which detracts from income growth, but the lack of an explicit
market price (associated with CFC and carbon emissions) means that economic harm is poorly measured, or
not measured at all (box 1.6).

Box 1.6 – Accounting for the environmental impact of carbon emissions: a stylised
exampleSome economists have experimented with applying a hypothetical market price to certain environmental
outcomes to investigate the potential impact on economic outcomes. An example of this for Australia is
putting a hypothetical price on carbon dioxide emissions (a price or cost per tonne of emissions) with aneye to estimating an ‘emissions cost’, which could then be deducted from real GDP per capita (figure).
Imputing a price to carbon emissions has the effect of reducing the estimate of past GDP but increasing theestimate of recent GDP growth. In other words, the failure to count carbon emissions as a cost has led in
the past to an over-estimate of GDP levels and an underestimate of GDP growth, as carbon emissions fell
between 2000 and 2020. For modest carbon price assumptions, these differences are relatively small.
This hypothetical example is an accounting exercise and does not purport to measure the economic
impacts of an actual carbon price. It does not necessarily imply that if an actual carbon price had been
imposed on the Australian economy in 2000 that incomes — and wellbeing — would have been lower.

10 This can be problematic when outputs, either directly (cigarettes and alcohol) or indirectly (pollution), detract fromincome and harm wellbeing. Similarly, regulations that, for example, lock up natural environments in the absence of amarket price carries an opportunity cost that may, to the extent that it bans productive uses, also detract from well-being.
22

Productivity growth and prosperity

Box 1.6 – Accounting for the environmental impact of carbon emissions: a stylised
exampleRather the examples serve to demonstrate the benefits of having a more complete view of theenvironmental impact of growth, either incorporated in or as a supplement to, measures of average
income. The example also assumes that Australia can wholly capture the benefits (and costs) of any
emissions reductions undertaken here. But ‘carbon leakage’ and offsetting actions by other countries
means this is unlikely the case. Moreover, because we do not know the cost of reducing emissions in thepast, we do not know whether we could have been better off by not cutting emissions as much as wehave. In other words, we do not know the net benefits of cutting emissions.
Accounting for carbon emissions decreases the measured level of incomes but
increases measured growth ratesa
a. GDP per capita levels

b. GDP per capita annual growth (1999-00 to 2019-20)

80000

1.6

75000

1.4
1.2

70000

1.0

%

65000
0.8

60000

0.6

55000
50000
2000

0.4
2005

2010

2015

2020

No cost$50 per tonne$90 per tonne$250 per tonne

0.2
0.0
No cost$50 pertonne$90 pertonne$250 pertonne

a. The value of a tonne of carbon dioxide emissions is assumed to be constant over time.
Source: Productivity Commission estimates using ABS (Australian System of National Accounts, 2019-20 financial
year, Cat. no. 5204.0, table 1); DISER (2021).

Productivity can be an imperfect reflection of wellbeing
Productivity statistics are not designed to explicitly measure wellbeing. While productivity growth equates tohigher real wages and higher consumption on average, most people consider their well-being with reference
to more than just the volume of goods and services that they can purchase.
Quality of personal relationships, a sense of fulfilment in life, mental health status, all play a role in how
individuals rate their subjective well-being. The well-being of individuals is a function of their own economic
outcomes (figure 1.9) but can also be related to their perception of the economic outcomes experienced byother people — for example, whether or not they perceive equality or fairness in the distribution of economic
resources throughout society.

23

5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 1.9 – The effect of unemployment on life satisfactiona

Impact on life satisfaction

0.2
0
-0.2

Women

-0.4
-0.6
Men
-0.8

X - significant at 1%
-1
-4

-3

-2

-1
0
1
2
No. of years before and after unemployment

3

4

5

a. Reproduced from analysis of data from the German Socio-Economic Panel Study between 1984 and 2003. Lifesatisfaction is measured on a 10-point scale.
Source: Clark et al (2008).

While productivity is not a direct measure of well-being, in practice it is a key input and often a correlate. The
level of productivity across countries correlates with numerous measures of well-being and environmental
outcomes (figure 1.10). Countries with higher productivity tend to have longer life expectancies, rate their life
satisfaction higher and have lower levels of income and wealth inequality.11
The positive cross-country correlation between productivity and various measures of well-being likely reflectsthat many measures are in fact highly correlated with material wealth and relative abundance. That is,
productivity improvements explicitly (for example, health related innovations that prolong life) and implicitly
improve well-being by creating additional income for given amounts of effort.
This means the productivity dividend has potential to ‘lift all boats’. It can be redirected by individuals into
consumption of goods and services that directly improve their own subjective well-being, and by businesses
and entrepreneurs into innovation and further investment. But governments can also redirect the dividend on
behalf of the community into areas that improve well-being for those who for whatever reason, may notdirectly benefit from productivity growth (unemployment benefits, publicly funded education and health care).
In this way, productivity growth is a positive policy objective.
To a certain degree, welfare improvement may be better assessed not by jettisoning traditional productivity
estimates but by considering a broad suite of welfare indicators in addition to productivity and income, suchas measures of inequality or disadvantage for particular groups.

11 For some measures of wellbeing, such as subjective happiness, the story is less conclusive, with some arguing thatthe correlation can be negative across time within the same country (for example Easterlin et al. 2010; Easterlin and
O’Connor 2020; Stevenson and Wolfers 2008).
24

Productivity growth and prosperity

Figure 1.10 – Productivity correlates with many other policy objectivesa,bCross country comparison of labour productivity (current PPP) against various measures of policy
objectives for 2019
Gini coefficient

85

BrazilLife expectancy (years)
Japan

Colombia

50

Value

Indonesia
VietnamTurkeyUnited States

Spain Luxembourg
FranceUnited States

NorwaySlovenia

60

90

Bangladesh Russian Federation
Indonesia
Philippines
Cambodia70

Denmark

Czech Republic

30

75

AustriaSwitzerland

Pakistan

0Finland

NorwayIsrael7

Ireland

Bulgaria

Philippines

30

Ireland80

Ecuador Mexico

40

Life satisfaction

8

Costa Rica

Costa Rica
Peru

Norway6

5

India
Pakistan65

MyanmarSouth Africa

TurkeyBangladesh
South Africa

4

0
30
60
90
Labour productivity (current PPP)

Myanmar

Sri Lanka
India

0

30

60

90

Life expectancy(years)Life satisfaction
a. Gini index ranges from 0 toGini
100 coefficient(higher is more unequal)
and life satisfaction
rangesfrom 0 to 10. b. Solid line is lineof best fit using a natural spline.
Source: Productivity Commission estimates using Feenstra, Inklaar and Timmer (2015).

Finding 2.7
Productivity provides the resources to improve wellbeing
Productivity growth is an imperfect measure of wellbeing, but higher productivity growth means more
opportunities for individuals, businesses and government to devote resources to directly improving wellbeing.

25Forces shaping Australia’s productivity challenge

2.

Forces shaping Australia’s
productivity challenge

Key points
Australian productivity growth is at its lowest rate in 60 years. This broad-based slowdown has been
observed across advanced economies.
• Australia’s productivity performance in the goods sector, including mining and agriculture, is consistently strong
when compared with global peers. Australia’s services — which employs almost 90% of Australian workers andaccounts for about 80% of economic activity — are comparatively less productive.
• Australia has slipped down the productivity rankings recently and has instead maintained its rich country
status largely through increasing the share of people in the workforce.
The Australian economy faces challenges bouncing back from its recent poor productivity
performance. These include:• Continuing increase in the size of the services sector, where productivity growth has historically been moredifficult to achieve than in the traditional goods sectors (e.g. mining, manufacturing and agriculture).
• A fast growing, government funded and regulated, non-market services sector (e.g. aged care, schools,
childcare and disability services), where a lack of competition and contestability can mask underperformanceand the freedom to innovate and the sharing of new approaches can be limited.
• Impacts of climate change and the task of decarbonising the Australian economy in line with international
commitments.
• Threats to open and flexible international markets for trade, capital and labour — which has benefited
Australia enormously in the past — as some countries turn inwards in the face of increasing global tensions.
COVID-19 prompted an acceleration in the uptake of digital technologies across the Australianeconomy and showed that when governments, businesses and households worked together they could
adapt quickly, including to remove long standing productivity bottlenecks.
As the economy evolves in the wake of COVID-19, increased digital capacity could lead to a productivity
dividend, particular in the services sector. Taking advantage of the opportunities afforded by digitaltechnology — such as online service delivery, artificial intelligence and data analytics — will require:• governments and businesses continuing to adopt and adapt innovative business models.
• a suitably skilled workforce (and training infrastructure) adept in non-routine tasks.
• access to data, much of which is collected through businesses reliant on funding or regulation of
governments, is not unduly locked down.

27

5-year Productivity Inquiry: Keys to growth Inquiry report

Australia has maintained its position as a relatively high income, high living standard economy for the past
200 years thanks to consistent, long-term growth in productivity. However, over the past decade, in line withmost advanced economies, Australia’s rate of productivity growth has slowed significantly. Indeed, theAustralian government has officially acknowledged the productivity slowdown, reducing the productivity
assumption underlying its annual economic forecasts from 1.5% to 1.2% (box 2.1).
Several contemporary forces will likely shape productivity growth in the future — as well as influencing
whether, and to what extent, the economy can bounce back from this slowdown.
• A growing services sector: The Australian economy, like most other advanced economies, is now
dominated by services, which account for about 80% of production and 90% of employment. Historically atleast, achieving productivity growth has been relatively difficult in services, particularly when comparedwith the rapid gains seen in the more traditional goods industries, such as agriculture, manufacturing andmining. Some of the most significant areas of services delivery are those — such as healthcare, agedcare, disability support and education — that are heavily regulated and have a substantial reliance on
government funding.
• The recovery from COVID-19: The pandemic has highlighted deficiencies in digital infrastructure and how
a lack of effective co-operation between governments, businesses and households in Australia can hobble
the economy during a crisis. Changing priorities during the pandemic highlighted the need for consistentinstitutional structures and an adaptable workforce, while the labour shortages in the wake of thepandemic bring a greater focus on investment in labour-saving technology.
• Decarbonisation: Australia is richly endowed with fossil fuel-based resources, but the economy — and thecountry more broadly — is highly exposed to downside risks associated with climate change.
Decarbonising the economy in line with international commitments over the next thirty years will have a
non-trivial bearing on productivity outcomes.

Box 2.1 – The projected impact of slower productivity growth on income and leisure
In the 2022-23 Australian Government Budget the productivity assumption was revised down to 1.2% from
1.5% (Commonwealth of Australia 2022).
This seemingly trivial downgrade implies that for average Australians, future incomes over the next
40 years (the timeline considered in the Australian Government’s Intergenerational Report) are projected
to be almost 20% lower than they would otherwise be.
And compared with the average over the past 60 years (1.8%), 1.2% productivity growth implies about 40%
less growth in projected future incomes and the working week will be 5% longer (figures).128

Forces shaping Australia’s productivity challenge

Box 2.1 – The projected impact of slower productivity growth on income and leisurea. GDP per capita in 2061-62 for different rates ofb. Average hours per worker in 2062 for different

average productivity growtha

rates of productivity growtha
32200000311600001.8% growth
1.5% growth
1.2% growth
1.0% growth

10000029
1.0% growth
1.2% growth
1.5% growth28
27

1.8% growth

26

0.022

0.024

0.02

0.018

0.016

0.012

0.014

0.01

0.008

0.004

Assumed average labour productivity
growth rate

25
0.006

0
0.002
0.004
0.006
0.008
0.01
0.012
0.014
0.016
0.018
0.02
0.022
0.024

80000

0

12000030

0.002

140000

Hours per worker

GDP per capita ($)

180000Assumed labour productivity growth rate

a. Estimates of GDP in 2021-22 taken from national accounts, estimates of hours worked taken from Labour Account
while estimates of employment taken from Labour Force Survey.
Source: Commission estimates using ABS (Australian System of National Accounts, 2021-22 financial year,
Cat. no. 5204.0, table 1; Labour Account Australia, June 2022, Cat. no. 6150.0.55.003, Industry summary table;
Labour Force, Australia, October 2022, Cat. no. 6202.0, table 1).
1 These projections are based on assumptions for forecasting incomes, productivity and working hours in 2062.

• The roles of capital deepening and multifactor productivity in driving labour productivity growth have not been
separately delineated. Relatedly, this model only considers gross measures (such as GDP and labour
productivity), and so the role of depreciation in decreasing incomes will not be considered.
• The employment to population ratio is the same as its present value. This is similar to the forecasts in theIntergenerational Report, which have participation rates falling from 66.3% to 63.6% between 2021 and 2061
(Commonwealth of Australia 2021, p. 35)).
• While the number of employees is fixed exogenously, working hours per worker decrease proportionally withlabour productivity about the rate at which they have since 1950. Historically, for every 10% increase in labour
productivity, average hours per worker fall about 2% (estimated using Feenstra, Inklaar and Timmer (2015)). This
assumption was used to forecast average working hours given.
• The role of international borrowing and investing as well as the terms of trade have been ignored.

29

5-year Productivity Inquiry: Keys to growth Inquiry report

2.1

Australia’s recent productivity performance

Consistent, but overall, not world leading …
The Australian economy has maintained a relatively high standard of living throughout the past hundred orso years. More recently, over the past five decades Australia has experienced healthy growth in real
incomes — up 250% between 1970 and 2019 (figure 2.1) — and today, Australia remains a relatively richeconomy with consumption levels well above average.
Figure 2.1 – Income and consumption amongst OECD economies
a. GDP per capitaa ($`000s)b. Consumption per capita ($`000s)a,b

120

120

60

60

100

50

50

Luxembourg

100

US
80

Australia

60

80

40

60

30

US

40

Australia

30
Average

Maximum

Maximum

40

40

20

20

10

0

0
1970

20

Average

Mexico20

10

TurkeyMexicoMinimum

Minimum

0
1970

1980

1990

2000

2010

2019

1980

0
1990

2000

2010

2019

a. OECD membership has changed over time. To reflect this, the group of countries included in the ‘OECD’ calculations
here changes based on the nearest decade at which the country ratified membership. Measured at chained PPPs inmillion 2017US$ using data from 2019. OECD average is weighted by country population. b. Consumption is realconsumption of households and government, at current PPPs (in mil. 2017US$).
Source: Feenstra, Inklaar and Timmer (2015).

Despite its strong income and consumption performance, Australia’s productivity growth has slowed
significantly in the past decade, falling to its lowest rate since the 1970s (figure 2.2). To put this inperspective, if, over the decade, productivity had instead grown at an annual rate consistent with the averageover the past 60 years (1.7% compared with 1.1%), gross national income per person would have been
about $4 600 higher (6%) in 2020 (ABS 2021a).
Australia’s performance should be placed in a global context. There has been a widespread and sizable
slowdown in productivity growth across most advanced economies recently.12 For example, average

12 Exactly why productivity growth has slowed is contested, as are the implications for future growth. The economics

literature identifies a number of potential culprits, which range from measurement error to fundamental changes in the
structure of the economy. Key sources include Gordon (2018), Mokyr (2018) and Syverson (2017).
30

Forces shaping Australia’s productivity challenge

productivity growth among OECD economies since 2005 was about one percentage point per annum below
the historical average (figure 2.3).13
Figure 2.2 – Australia’s labour productivity growth in the past decade has been theslowest in 60 yearsa,b,c
3.0

2.5

2.4

2.4

2.2
1.4

2.0

1.8
1.6

1.5

1.2

1.5

1.1

1.0
0.5
0.0
1960-70

1970-80

1980-90

Labour productivity growth by decade

1990-00

2000-1030 year average

2010-20post 2020

60 year averagea. Labour hours from 1960 to 1980 come from the Penn World Tables. b. All years are the financial year ending in thatyear. So the range 1960–1970 is actually 1959-60 to 1969-70 but has been shortened for readability. c. The period
averages are based on the 2021 ABS Annual National Accounts. The average annual productivity growth rate over 30
years to June 2020 is 1.6%, compared with 1.5% reported in the 2021 Intergenerational report (Commonwealth ofAustralia 2021) for the 30 years to June 2019.
Source: Productivity Commission estimates using ABS (Australian System of National Accounts, 2020-21 financial year,
Cat. no. 5204.0, table 1); Feenstra, Inklaar and Timmer (2015).

13 From a global perspective, the slowdown is particularly evident in advanced economies; developing countries are

growing faster than ever before. In fact, global income growth is currently the fastest it has ever been, with the living
standards of some of the world’s poorest countries improving at the fastest rate on record (Bolt and van Zanden 2020).
31

5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 2.3 – Most OECD countries have experienced a productivity slowdowna
Labour productivity growth in OECD countries (%)

1980 to 2005

Average

Switzerland

IsraelItaly

New Zealand

Netherlands

Spain

Australia

GreeceAustria

Iceland

US

Portugal-2

Belgium-1

Sweden-1Germany0

Denmark0

Luxembourg

1

France1UK

2Norway

2

Japan

3

Finland3

Turkey4

Ireland

4-2

2005 to 2019a. Includes only the 24 longest standing OECD countries. For some countries, the average growth rate between 1980
and 2005 could not be calculated due to missing data for the 1980s. Countries where the average growth rate wascalculated for a narrow window were: Austria (1995 to 2005), Greece (1983 to 2005) and Israel (1981 to 2005).
Source: OECD (2022b).

Finding 2.8
Productivity is growing at its slowest rate in 60 years
Australia’s productivity is growing at its lowest rate in 60 years, consistent with a broad-based slowdown in
productivity growth among advanced economies.

Despite maintaining a high income ranking since the 1970s, there has been a long-term decline in Australia’s
relative labour productivity growth performance. Labour productivity has not recovered after falling behind in
the three decades to 2000. Between 1970 and 2020, Australia’s labour productivity ranking fell ten placesfrom sixth in the OECD, to sixteenth (figure 2.4).
Australia’s productivity is now about 22% lower than that of the United States — a country typicallyacknowledged as the ‘global frontier’ economy.
An important reason that the living standards of Australians have remained among the top tier advanced
economies despite our middling productivity growth, is that a higher-than-average proportion of Australians
work, and they work relatively long hours (figure 2.5).

32

Forces shaping Australia’s productivity challenge

Figure 2.4 – Australia’s income position belies its middling productivity performancea
a. GDP per capita and productivity % of OECDb. Australia’s GDP per capita and productivity by rank

(OECD = 100)amongst OECD countries

125

125
GDP per capita

120

0

0

120

5
115

115

110

110

105

105

5
GDP per capita

10

10

15

15

Labour productivity
100

100

95

95

Labour productivity
20

90

90
1970 1980 1990 2000 2010 2019

20

25
1970

1980

1990

2000

25
2019

2010

a. OECD membership has changed over time. To reflect this, the group of countries included in the ‘OECD’ calculations

here changes based on the nearest decade at which the country ratified membership. Measured at chained PPPs inmillion 2017US$ using data from 2019. OECD average is weighted by total hours.
Source: Productivity Commission estimates using the Penn World Tables (eleventh edition).

Figure 2.5 – More Australians work, and they work longer hoursa
a. Employment to population ratio

b. Average weekly hours per worker

0.8

0.8

50

50

Luxembourg

0.7

0.7

0.6

0.6
Australia

US

Mexico40Australia
Average35

0.4Minimum

0.3

Turkey

1990

2000

2010

Sweden30
Minimum

0.2
1980

2019

35

US

0.4

0.2
1970

45

Ireland

0.5

Average

0.3

Korea

Maximum

40

Maximum

0.5

45

25
1970

30
Netherlands

Denmark

25
1980

1990

2000

2010

2019

a. OECD membership has changed over time. To reflect this, the group of countries included in the ‘OECD’ calculations

here changes based on the nearest decade at which the country ratified membership.
Source: Productivity Commission estimates using the Penn World Tables (eleventh edition).

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5-year Productivity Inquiry: Keys to growth Inquiry report

Finding 2.9
Increasing participation cannot substitute for sustained productivity growth
The increasing share of people in the workforce has shielded Australia from some of the effects of slowing
productivity growth, but sustaining an ever-increasing share of people in the workforce (and maintaining
their income levels) is neither possible nor desirable.

Australia’s employment to population ratio has increased since 1970, from 42% to 51%, moving from below theaverage to above the average in the OECD. (This is primarily due to a substantial increase in Australia’s female
participation rate over the past 40 years, and a slight fall in the male participation rate (ABS 2022d)). Although
average working hours in Australia fell by about 10%, or about 4 hours in the 5 decades to 2019, average
hours amongst OECD peers fell more. In some European countries, such as Norway, Belgium and Denmark,average working hours fell by as much as 25% or more, or the equivalent of an entire standard working day fora full-time worker in Australia today (figure 2.6).14
On a per capita basis, Australians work longer hours than about 60% of their OECD peers. This maintains a
relatively high level of GDP per capita (figure 2.6).
Figure 2.6 – Labour productivity and hours worked per head of populationa
Hours per person per week
10

13

16

22

25

28

Increasing GDP per capita

Ireland200
Switzerland

Norway150

Denmark
FranceGermany
UK

100

Australia
NZ

Malta

RussiaPakistan

China

GreeceCambodia

India
60

50
GDP per capita= Austraia

TaiwanJapan

Brazil0100
GDP per capita> Australia

CanadaArgentina
50

Luxembourg

US

Belgium

80

100

120

140

Labour Productivity% of Aus Labour Productivity

OECD countries

19

GDP per capita< Australia
0160% of Aus hours per person per week

a. Labour productivity is GDP per hour worked measured at chained PPPs in 2017US$.
Source: Productivity Commission estimates using the Feenstra, Inklaar and Timmer (2015).

14 When making comparisons (and finding ‘learnings’) between Australia and other countries it is important to the effectof labour utilisation into account. For example, some countries (e.g. France) with higher levels of labour productivity thanAustralia appear to have labour markets that exclude marginal members of the workforce (lower participation and higher
unemployment) and prevent workers from working longer hours where they might be less productive (by restricting thelength of the working week). Tax and other policy settings also affect labour utilisation and participation. In somecountries, higher measured productivity levels could be the result of policy settings which prevent less productive
workers from participating in the labour market.
34

Forces shaping Australia’s productivity challenge

In principle, if Australia could close the relative productivity gap it would bring significant benefits for the
average Australian in line with the productivity dividend described in chapter 1 (box 1.4). For example:• if Australia’s labour productivity were at the same level as Belgium — a country with a very similar GDP
per capita to Australia (the dashed line in figure 2.6) — Australian’s per capita hours worked could be
about 4 hours fewer per week without any reduction in income. This would translate to about one fewer
day per week for each working Australian, other things equal — a leisure dividend• alternatively, with a shift in productivity such that it was in line with Belgium, but with a more modest
reduction in hours worked — about 0.5 hours fewer per capita, or just over an hour per week for the
average Australian worker — Australia’s GDP per capita would increase by about 25%, in line with theaverage American — a consumption dividend (figure 2.6).

Finding 2.10
Closing the productivity gap requires working smarter
Closing the productivity gap to our OECD peers requires working smarter so that Australia can havehigher GDP per capita without having to work longer.

Goods sector productivity is strong, but services continue to lag
Australia’s goods sector has performed relatively well over the past two decades when compared with
European countries, the United States and Japan (figure 2.7).15 The relative performance of the services
sector is less impressive, but both sub-sectors (non-market and market) are steadily improving.
Breaking each sector into its component parts shows that in the goods sector, agriculture and mining
consistently perform at, or within, the top 5 countries. The ranking for the manufacturing sector — which
accounts for about 5% of the Australian economy — has continued to slide after the peak of the mining
investment boom in the early 2010s.16

15 Cross-country, industry-level, labour productivity statistics are constructed by estimating industry-level purchasing

power parity (PPP) adjustments using the most recent internationally available estimates from 2014. These estimatesshould be interpreted cautiously. Aggregated results (whole economy or sector level) are more reliable thanindustry-level results due to the uncertainty regarding the pricing differences across countries for particular products andindustries. Further, the relative ranking of countries is more robust than the particular estimates themselves. This has
been confirmed in comparisons of multi-country productivity datasets which vary significantly in their absolute (andgrowth) estimates but vary little in their rankings of different countries.
16 The cause of this decline may be related to ‘Dutch Disease’, associated with the mining investment boom whereby the strong
resources sector raises the value of the Australian dollar and reduces the relative competitiveness of the manufacturing sector.
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5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 2.7 – Australia’s labour productivity performance is strong for goods, but much
weaker — although improving — for servicesa,b,c,da. Labour productivity (% of frontier)b. Labour productivity rank (of 25 countries)
0

100
90

0.2

5

80
Non-market services

70
60

50

Market services

40

Rank (out of 25)

Proportion of frontier (%)

0

Goods

0.4

10
0.6
15
0.8

30
20

20

1

10
25

0
1995

2000

2005

2010

2015

1.2
1995

2000

2005

2010

2015

a. ‘Frontier country’ refers to the country with the highest labour productivity in a particular industry or sector in aparticular year. Using the frontier country as a benchmark leads to more stable results than a constant benchmark
country (e.g. the United States). b. Goods encompass manufacturing, mining and agriculture; market services includes
all services other than non-market services and non-market services are education, health care and public administrationand defence. c. The comparator set includes 25 countries, 21 of which are in the OECD (Australia, Austria, Belgium,
Bulgaria, Cyprus, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece, Croatia, Hungary, Ireland, Italy,
Japan, Lithuania, Luxembourg, Latvia, Malta, Poland, Slovenia, Sweden and the United States) plus Bulgaria, Cyprus,
Croatia and Malta. Data limitations make comparisons to a broader array of countries difficult. d. The PPP benchmark
year is 2014, these level estimates were then extrapolated using estimates of labour productivity growth. This means
results closer to the 2014 benchmark year are more reliable than those well before or well after this date.
Source: Productivity Commission estimates using the World Input Output Tables, UN Comtrade data and unpublisheddata from the World Bank International Comparisons Program.

Services are characterised by a clear separation in relative performance between personal services (such as
hotels, cafes and gyms), which ranks consistently in the top 5 countries, and the professional, non-market
and distribution services, where performance is improving (in the face of the broader advanced economy
productivity slowdown) but remains outside the top 10 (figure 2.8).

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Forces shaping Australia’s productivity challenge

Figure 2.8 – Manufacturing and industrial services are Australia’s productivity laggards
a. Goods sub-sectors

b. Services sub-sectors

Labour productivity rank (out of 25)
0

5

5

10

10

Rank

Rank

Labour productivity rank (out of 25)
0

15

15
20

20

25

25
1995

2000

Agriculture

2005

2010

Manufacturing

2015

1995

2000

2005

MiningDistribution services
Business services

2010

2015

Industrial services
Personal services

a. Distribution services are transport and postal, IT and telecommunications and retail and whole trade; industrial
services are construction and utilities; personal services are food and accommodation and arts and recreation; andprofessional services are professional, scientific and technical services, real estate, finance and administration andsupport services. b. See notes c and d in figure 2.7.
Source: Productivity Commission estimates using the World Input Output Tables, UN Comtrade data and unpublisheddata from the World Bank International Comparisons Program.

Finding 2.11
Australia’s relative productivity is high in goods but low in services
Australia’s relative global productivity performance is strong in the goods sector, which includes mining
and agriculture. Services are comparatively less productive on average, but our rankings are improving.

2.2

Forces shaping future productivity growth

As Australia continues to become a more services-centric economy, real wages and national welfare will be
increasingly dependent on services sector productivity. But driving productivity growth in (at least parts of)the services sector has, on average, been more difficult compared with the goods sector, which includes
agriculture, manufacturing and mining.
In addition to the ongoing challenges presented by climate change and transitioning to a lower carbon
economy, the global pandemic has disrupted production processes and service delivery in many industries.
In some cases this has led to productivity gains but maintaining this momentum as Australia recovers fromCOVID-19, and embedding innovation over the long term, represent further productivity challenges.

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5-year Productivity Inquiry: Keys to growth Inquiry report

The dominance of services
The services sector defies definition as it covers such a broad array of products from brick laying toneurosurgery. The Economist quipped that services are ‘products of economic activity that you can’t drop on
your foot’ (The Economist nd). The services sector is by far the largest part of the Australian economy —almost 90% of Australian workers are employed in the services sector and it accounts for a little more than
80% of economic activity.17 Both of these figures have grown significantly over the past 70 years — fromabout 50% in 1950 (PC 2021b, p. 6).
The general increase in the overall size of the services sector, while the goods sector (agriculture, mining
and manufacturing) has contracted, is a typical characteristic of the course of economic development incountries (PC 2021b, pp. 5, 7).
Over the past 35 years in Australia, the expansion of employment in the services sector has been mainly ingovernment subsidised and regulated ‘non-market’ services — in particular, health care and social
assistance — but also business services. Employment in distribution services (retail and wholesale trade,transportation and warehousing) has contracted. The pattern is slightly different when viewed as a share of
the economy: the economic contribution of the difficult-to-measure non-market services has plateaued while
the contribution of business services has increased in line with their share of employment (figure 2.9).18

17 The ABS (2013b, 2019b) defines services as all products in the following divisions of the Australian and New ZealandStandard Industry Classification 2006: The Electricity, Gas, Water And Waste Services (Division D), Construction(Division E), Wholesale Trade (Division F), Retail Trade (Division G), Accommodation And Food Services (Division H),
Transport, Postal And Warehousing (Division I), Information Media And Telecommunications (Division J), Financial And
Insurance Services (Division K), Rental, Hiring And Real Estate Services (Division L), Professional, Scientific And
Technical Services (Division M), Administrative And Support Services (Division N), Public Administration And Safety(Division O), Education And Training (Division P), Health Care And Social Assistance (Division Q), Arts And Recreation
Services (Division R), and Other Services (Division S). Services also include Agriculture, Forestry and Fishing Support
Services (otherwise part of Agriculture (Division A)); and Exploration and Mining Support Services (otherwise part of
Mining (Division B)). The goods sector includes Agriculture, Mining and Manufacturing (Division C) except for Forestry
and Fishing Support Services, and Exploration and Mining Support Services.
In this report, each services division is subsequently aggregated into five categories (a slight modification to thecategorisation used in Connolly and Lewis (2010)): 1. Business, (Division K-N); 2. Industrial (Divisions D & E);
3. Personal (Divisions H, R & S); 4. Non-market (Divisions O-Q); 5. Distribution (Divisions F, G, I & J).
18 The productivity of the non-market sector is not regularly reported as part of the national accounts process because
there are no market prices — a key building block in measuring productivity. Some irregular experimental measures ofmultifactor productivity are available for the hospital, higher education and schools sectors, and are very limited in theirusefulness, not least because they are largely based on output measures — for example, in the hospital sector, numberof diseases treated (PC 2017b).
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Forces shaping Australia’s productivity challenge

Figure 2.9 – The increase in the share of the services sector is largely attributable tonon-market and business servicesa,bGoods sector and services subsector shares of total employment and total gross value added
Employment

Value added
100

100
Non-market services

90

90
80

80
Industrial services

70

Personal Services

60
50

Share (%)

Share (%)

70

Business services

40
30

50
40
30

Distribution services

20

20
10
0
1995

60

10

Goods
2000 2005 2010 2015
Financial year ending

2020

0
1995

2000 2005 2010 2015
Financial year ending

2020

a. Employment is weighted by hours worked rather than a simple headcount of employees. b. See footnote 5 for a
description of the categories.
Source: PC (2021b).

The services sector rise reflects our growing prosperity
The rise of the services sector is symptomatic of rising prosperity and productivity growth more broadly.
First, as economy-wide productivity has increased, higher incomes have led to more consumption of services
compared with goods (that is, services demand is relatively responsive to income changes). Consumption ofholidays, house-cleaning, afterschool care, gyms and home delivered food has grown faster than that ofTVs, clothing and sports equipment (Beech et al. 2014).
Second, as productivity growth in goods sectors (such as manufacturing) outstripped the services sector
average, the relative price of services rose. This phenomenon is often referred to as ‘cost disease’, or lesspejoratively, ‘the Penn effect’ (Baumol 1967; Vollrath 2017). Because demand for many services has proven to
be relatively unresponsive to price increases, overall spending on services has grown relative to spending on
goods. On the supply side, the resources freed up by higher goods sector productivity flowed into the services
sector, where productivity growth has been harder to achieve.19 That is, high productivity growth in ‘progressive’sectors has led to a shift of labour and other resources to the less progressive sectors (i.e. those sectors withlow productivity growth), which grow as a share of the economy overall. This in turn slows the overall rate ofproductivity growth across the economy. As economist Charles Jones (2021, p. 31) put it, ‘Economic growth isdetermined not by what we are good at but rather by what is essential and yet hard to improve.’

19 Given the enormous diversity in services, cost disease does not affect all of them. Some services have not seen

significant growth in consumption or prices as the economy has grown either because these services have productivity
growth similar to the goods sector (such as distribution services or business services, discussed below) or because
demand for these services is not closely tied to income growth, or rather it is responsive to price increases.
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5-year Productivity Inquiry: Keys to growth Inquiry report

Hence, in many respects, the rise of the service sector is really the story of the decline in the relative share of
the goods sector as the good sector has become more productive. A stark example of this is the agriculture
sector, which has seen large increases in productivity while its share of the labour force has declined (box 2.2).
While the term ‘cost disease’ has negative connotations, it is arguably just a product of rising prosperity andproductivity growth in some sectors of the economy.20 So long as other parts of the economy demonstrate
the twin properties of demand growing with income and productivity being slower than the economy-wide
average, that part of the economy will tend towards some degree of cost disease.
But this does not make slow future productivity growth inevitable. It is simply the context for the productivity
challenge. As long as the economy can continually evolve, finding new ways to innovate and raise
productivity in those lagging (but growing) sectors, ongoing productivity and income growth is possible.

Box 2.2 – Will services productivity follow the path of agriculture?
At the beginning of the twentieth century, about 25% of all Australian employees — 371 000 people —worked in the agriculture sector. Collectively, this workforce produced just over 1 million tonnes of wheat,
239 million kg of wool and included about 9.4 million head of cattle. Flash forward to the end of the century
and about 5% of Australian employees — 348 000 people — worked in the agriculture sector. But thisworkforce (and a lot of machines) now managed to produce almost 25 times more wheat (25 million
tonnes) and over two and half times as much wool and head of cattle (642 million kg and 28 million headrespectively). This smaller agricultural workforce is also both working more land and making the land theyuse more productive. In 1900, two hectares of land was required to produce about one tonne wheat, whilein 2000 producing a tonne of wheat required about half a hectare of land — that is, the yield quadrupled.
A contracting agricultural workforce is not unique to Australia. In 1500, about 60% of workers in (what isnow) the United Kingdom were devoted to agricultural production compared with about 1% in 2019. But
how has productivity in the agricultural sector led to such large shifts in the structure of the workforce inAustralia and elsewhere?
The main reason agriculture has seen a falling share of employment and output while its productivity has
increased is a manifestation of Baumol’s cost disease — a combination of relatively rapid productivity
growth within agriculture compared with the rest of the economy combined with consumer preferences.
As productivity growth in agriculture increased it became more profitable to replace people withmachines — threshers, reapers and tractors do the work of dozens of people (and animals). The otherreason is that as agricultural and economy-wide productivity improved, there was increased demand for
non-agricultural goods and services that led to higher wages in these sectors, and so attracted thesurplus labour from agriculture.
By reducing the amount of labour required in agricultural production, Australia has been able to effectively
redeploy additional workers to meet demands for other important needs and wants — doctors, nurses,
teachers and even baristas — which were largely unmet in a predominately agricultural economy.

20 A point forcefully made in Dietrich Vollrath’s ‘Fully Grown’ (Vollrath 2019).

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Forces shaping Australia’s productivity challenge

Box 2.2 – Will services productivity follow the path of agriculture?
Will services repeat the same trend?
As the services sector grows in importance, the question arises
as to whether it (or at least parts of it) will repeat the patternobserved in agriculture. That is, will some part of services have
rapidly expanding output while its workforce contracts?
We have already seen the agriculture story play out in parts ofthe service sector. In 2004, the largest US video rental store,
Blockbuster, had about 84 000 employees globally while in
2021 the largest streaming service Netflix, which along withsimilar companies largely replaced video rental, had only 11 600 employees. At the same time, while
official numbers are unavailable, the number of views of video content on Netflix in 2021 was almost
certainly higher than the number views of rental videos back in 2004 (with a larger variety and easieraccess). A similar story has played out in offices with the uptake of computer word processing power —fewer people are employed as typists or secretaries, but far more pages of documents are produced.
It remains to be seen how widespread the achievement of productivity improvements through similarsuch labour-saving approaches will be. But it is not obvious that these trends in labour use would
necessarily be replicated in all parts of the services sector — particularly in services that involve
non-routine tasks or non-cognitive experience — at least in the short term.
Source: ABS (2013a); Blockbuster Inc. (2004); Butlin (1969); Butlin, Dixon and Lloyd (2015); Netflix Inc. (2021);
Roser (2013).

There are several other contributors to the increase in the share of the services sector. Global economic
factors include the shift of the manufacturing base into East and South East Asia in the late twentiethcentury, which was driven by access to a large pool of relatively cheap labour. This shift was facilitated inAustralia when domestic manufacturing was increasingly exposed to international trade via the removal oftariffs beginning in the 1960s. In some industries, outsourcing meant that a services component (such as
sales or marketing) of what was a manufacturing operation, was outsourced and remained in Australia evenafter the manufacturing moved offshore.
Australia’s aging population and shifts in other demographic factors contribute to an expandi ng services
sector, especially the government run- and regulated non-market services. As our population ages,
demand for health and aged care services increases, which is likely to weigh on productivity growth. The
most recent Intergenerational Report projected that over the next 40 years the share of the population
aged over 65 will increase to nearly 23% as the baby boomer generation ages (panel b figure 2.10). This
will drive the dependency ratio — the ratio of working age people to non-working age people — down byalmost a third, from 4 people today to 2.7 in 2060 (panel a figure 2.10). And consistent with the higher
labour force participation of women, demand for childcare services is likely to at least keep pace withworking age population growth.

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5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 2.10 – The aging population will further increase Australia’s services sector
a. Old age dependency ratioa

b. Older Australians by level (millions) (LHS) and share (RHS)

6

6

Baby
boomers
turning 65

5

8

20%

7

5
6

4

4

3

3

2

2

15%

5

2019

4

2060

10%

3
2

1

1

0
2000-01

2015-162030-312045-4602060-61

5%

1
0

0%
Aged 65-84

Aged 85+

a. Number of people of traditional working-age (15-64) for every person aged 65 and over.
Source: Commonwealth of Australia (2021).

Finding 2.12
Services dominate the economy
Similar to other advanced economies, the services sector dominates the Australian economy. This reflects
both the impact of higher incomes on consumer preferences, and the fact that productivity gains havebeen harder to secure in many service industries — making services relatively more expensive. Australia’s
industry structure also reflects our areas of comparative advantage (which for example, leads to a relianceon imported manufactured goods) and demographic factors such as an ageing population.

Productivity growth in services tends to lag the goods sector — though there isgreat variation
On average over the past 35 years, market-based measures of labour productivity have been higher in the
goods sector than any subsector within the services sector (figure 2.11).21 But as discussed, services arehighly diverse, including with respect to productivity growth.
Since 1995, the services sub-sector with the fastest productivity growth was distribution services (which
includes retail and wholesale trade, transportation and warehousing, and information media and21 The figures in this section for the services subsector productivity performance differ from those presented in the‘Things you can’t drop on your feet’ Productivity Insight report (2021b) due to data revisions by the ABS. These reflect,among other issues, the ABS’ move from the use of the labour account (from the labour survey) and revisions to several
industries’ historical GVA estimates (ABS 2021b).
42

Forces shaping Australia’s productivity challenge

telecommunications). Growth in distribution services was about 7 times faster than in industrial services, theslowest growing sub-sector, but still about 15% slower than productivity growth in the goods sector.
Figure 2.11 – Labour productivity growth in Australia by subsectora,bIndex (1995 = 100) between 1994-95 and 2020-21
220

200

Goods

180

Distribution services

160
140

Personal services
Business services

120

Industrial services

100
80
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

a. Industries at the ANZSIC 1 digit level were aggregated into sectors by weighting the growth in labour productivity by
the hours share of that industry (in the previous year). b. See footnote 17 for definition of services aggregation.
Source: Commission estimates using ABS (Estimates of Industry Multifactor Productivity, 2020-21 financial year,
Cat. no. 5260.0.55.002, tables 1-19; Labour Account Australia, March 2022, Cat. no. 6150.0.55.003,
Industry summary table).

The variation across sources of labour productivity growth — multifactor productivity (MFP) and capital
deepening (appendix A.1) — for Australia’s goods and services industries is significant (figure 2.12).
Since the mid-2000s, the goods sector’s MFP growth has been broadly in line with most of the services
sub-sectors but significantly slower than for distribution services — where average annual MFP growth was
fastest. Ironically, given the broader upside benefits to Australia, a significant driver of the relatively slow
goods sector MFP growth was the mining sector. The price shock that caused a terms of trade boom in the
2000s (box 1.3) made extraction of resources from low productivity mines profitable and led to a massive
capacity expansion characterised by investment in infrastructure with long, unproductive lead times.
Apart from personal services, which has seen the fastest capital deepening of any subsector of the economy
over the past 25 years (possibly reflecting the fact that repair services, a subsector within personal services,
has become increasingly capital intensive and computerised), the rate of growth of capital deepening in theservices sector has been consistently lower than in the goods sector since at least the mid-2000s. This isparticularly true for the business and industrial services sub-sectors, which have also seen large increases in
employment in recent decades.

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5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 2.12 – Components of productivity by subsector between 1994-95 and 2020-21a,ba. Capital deepening index (1995=100)

b. Multifactor productivity index (1995 = 100)

350

140
135

300

130
125

250

120
115

200

110

150

105
100

100

95

50
1995

2000

2005

2010

2015

2020

90
1995

2000

2005

2010

2015

2020

a. MFP growth at the ANZSIC 1 digit level was aggregated into sectors by weighting the growth in MFP by the gross value
added share of that industry (two year weighted average). The capital deepening contribution for each sector was estimatedby differencing sector growth in labour productivity from sector growth in MFP. Capital deepening itself was then estimatedby dividing the capital deepening contribution by industry by its estimated sector labour income share. Sector labour income
shares were estimated by multiplying the factor income shares in the ABS MFP statistics by the total factor income for thatindustry in the national accounts and then adding up the capital and labour incomes. b. Subsectors are — Goods: Mining,
Manufacturing, Agriculture, forestry and fishing; Industrial services: Electricity, gas, water and waste services, Construction;
Distribution services: Transport, postal and warehousing, Information media and telecommunications, Retail trade, andWholesale trade; Business services: Professional, scientific and technical services, Financial and insurance services,
Rental, hiring and real estate services, and Administrative and support services; Personal services: Accommodation andfood services, Arts and recreation services, and Other services.
Source: Productivity Commission estimates based on ABS (2021, Estimates of Industry Multifactor Productivity, 2020-21
financial year, Cat. no. 5260.0.55.002).

Finding 2.13
Goods productivity growth is typically faster than services, though with great variation
Productivity growth in the goods sector is faster than in services. However, reflecting their diversity, thevariation in growth rates across the services subsectors is substantial.

The large and growing non-market sector could drag on productivity
The large and growing ‘non-market’ sector — including health care, education and public administration22 ischaracterised by government funded, regulated and often, government operated institutions. The commercial
22 The ABS delineates non-market from market services because extensive government subsidies and funding meanthat the prices charged for non-market services do not correspond closely to either the marginal cost or marginal benefit
associated with receiving the service.
44

Forces shaping Australia’s productivity challenge

strictures of the market sector — such as competition and cost reflective pricing — which help drive
innovation and productivity growth are effectively missing.
Measured labour productivity growth in this sector has been close to zero since the turn of the millennium(ABS 2021a). While quality may play a bigger role in productivity improvement in certain parts of thenon-market sector (especially health care), and such improvements are often poorly measured by statisticalagencies (appendix A3), there are several reasons to think that labour productivity is still slower in this sector
than for the relatively less heavily regulated market services sectors.
First, the non-market sector drags on productivity in ways not measured by productivity statistics. This dragcomes from the fact that as many non-market services are heavily subsidised, their increasing size is likely torequire increasing revenue to fund them, which would require increasing taxation and increasing losses of
economic activity as a result.23 Tax reform to reduce the economic burden imposed by taxation could help
alleviate this issue, but in the absence of reform, an increasing non-market sector will likely weigh on growthin ways not captured by productivity growth statistics within the sector itself.
Second, while health care has almost certainly benefited greatly from unmeasured quality improvements,
many of these have come through improved inputs supplied by other industries. For example, bettermedications have made health care more effective but pharmaceutical manufacturing is a subset of thegoods sector.24 In some respects, the organisation of health care itself has changed very little over timecompared with the massive transformations of workplaces in other parts of the economy. Consider thethought experiment given by Rohan Mead in which Florence Nightingale comes back from the grave and istaken to a modern acute hospital.
After an hour’s in-service, she is almost ready to clock on for a shift. Florence has identified
the nurses’ station on the ward, seen her fellow nurses fan out to the familiar pattern of patient
beds where they check temperatures (with slightly fancier thermometers), dispense
medications and manually update patient records. She rankles at the continuing sociallyconveyed demarcation between doctors and nurses. A century and a half on from the prime ofher nursing days, Florence feels at home. (Mead 2017)
This highlights just how much of the innovation within health care has come from the inputs being supplied tothe sector rather than changes in business systems within healthcare.
To understand how quickly the non-market sector will continue to grow and what implications this could have for
productivity growth, the Commission developed a simple model of the economy out to the year 2060-61 (thetimeframe of the Intergenerational Report) under a number of scenarios. This model is outlined in appendix A.5.
It can be seen that in most scenarios, the non-market sector will likely continue to grow as a share of output
and employment (figure 2.13).25 And it is likely that labour productivity growth rates will continue to decline as
this sector continues to grow (figure 2.14). Indeed, under these projections the assumed labour productivity
growth rate of 1.2% used in budgetary papers will not be attained after 2030 (Commonwealth of Australia

23 Higher taxes can distort economic activity through a number of channels including reduced incentive to work, invest

and innovate. Some of these channels are discussed in Volume 3.
24 If a gross output (as opposed to gross value added) approach to multifactor productivity measurement were possible
for the non-market sector, this would be able to adjust for these affects and give a more accurate picture of health care
performance.
25 In this simple model, the growth in the share of output and employment of the non-market sector are identical.
45

5-year Productivity Inquiry: Keys to growth Inquiry report2022).26 And this is projected to occur under the assumption that market sector productivity continues toimprove at a high average rate (1.66%).
The only scenario where the non-market sector did not continue to expand and did not drag down on
productivity was where it was assumed that governments and households chose not to spend beyond a fixedproportion of their budget on non-market services. This could occur, for example, if governments decided tocap the proportion of their spending they would allocate to say health or education. However, such a policy
would require a reduction in the amount of (per person) services available to Australians, highlighting thedifficult trade-offs created by this low productivity growth.
While these forecasts are stylized, they clearly illustrate to policy makers that if the historical rate ofproductivity growth in the non-market sector does not change (i.e., productivity growth remains close to 0),
this sector is likely to continue to grow in size and cost, imposing a significant drag on aggregate productivity
growth. The prospects for, and policy settings that would better enable innovation in the non-market sector
are discussed in volumes 8 (education) and 5 (non-market innovation).
Figure 2.13 – Projected growth of the non-market shareNon-market sector share of the labour force (%) between 2000-01 and 2060-61
non-market % of labour hours

48
43
38
33

28
23
18
2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Historical

Crude extrapolation

M1: Constant consumption ratio

M2: Constant expenditure ratio

2055

2060

M3: Constant elasticity of substitution

Source: Commission modelling (appendix A.5).

26 Only under the assumption that consumers and governments maintain a constant share of their expenditure on

non-market services would labour productivity continue to meet or exceed the budget assumptions. However, of thethree scenarios, this one is the least realistic (appendix A.5). Indeed, such a scenario could only occur if both private
consumers and governments were willing to have real reductions in the amount of non-market services they purchase inorder to maintain the same share of expenditure.
46

Forces shaping Australia’s productivity challenge

Figure 2.14 – The larger non-market sector will likely weigh on productivity growth
Projected whole economy labour productivity growth between 2020-21 and 2060-61
1.25

1.2

1.15
%

1.1

1.05

1
2021

2026

2031

2036

2041

2046

2051

M1: Constant consumption ratio

M2: Constant expenditure ratio

M3: Constant elasticity of substitution

Treasury assumption

2056

2061

Source: Commission modelling (appendix A.5).

Maintaining momentum in the use of data and digital technologies
A defining characteristic of our COVID-19 times, from March 2020 to the lifting of the last significant restrictions
in early 2022, was the hastened adoption of digital technologies to help the economy continue to function. Thishas been exemplified by governments, businesses and employees alike embracing the move to regular
working from home (PC 2021c). The adoption of digital technologies constituted a massive productivity boost,relative to a counterfactual scenario in which such technologies did not exist or were not adopted en masse.
At the height of the outbreak, as many as two out of three people may have been working from home (Baxter
and Warren 2021). COVID-19 accelerated the trend of more people working from home, more often. The shareof people ‘regularly working from home’ in late 2021 was 40%, about 8 percentage points higher than in 2019,prior to the onset of the pandemic, and about twice what it was a decade prior (figure 2.15). The share ofpeople working ‘most of their hours’ from home was as high as 30% in 2020 (although this has moderated
somewhat since then), more than 4 times higher than when it was last measured in 2008.
It is uncertain what proportion of people will continue working from home as the pandemic ends andeconomic recovery progresses. However, the uplift in online capacity (among both businesses andhouseholds) combined with a broader embrace of the innovative potential of digital technology, cantransform the way the economy operates — services in particular — with significant productivity benefits.
The challenge will be to ensure that policy settings are sufficiently flexible and incentives are appropriately
calibrated to support continued uplift as the COVID-19 recovery continues.

47

5-year Productivity Inquiry: Keys to growth Inquiry report

Figure 2.15 – COVID-19 accelerated a trend to increasing working from home60
High estimate

50

Low estimate

40
30
20
10
0

Work from home most of the time (%)

Worked from home (%)

Source: ABS (2021c).

Sustaining uptake of online service delivery
COVID-19 highlighted pre-existing productivity bottlenecks in both the private and public sector, and in somecases underlined how quickly and easily some of these (arbitrary) bottlenecks could be removed byembracing online service delivery. As the Australian economy becomes increasingly dominated by services,
embedding these changes into businesses’ and governments’ operations will consolidate longer-term
productivity dividends from online activity and services.
Virtual interactions via online platforms provided a crucial substitute to physical face-to-face interactions,which effectively ceased during phases of the pandemic. Across a range of sectors, businesses that had
previously only operated from a ‘bricks and mortar’ location invested in online capacity to take orders andpayments from customers while also discovering entirely new customer groups, including in overseas
markets (figure 2.16). Use of digital documentation and signatures for transactions by legal and financial
services that were previously reliant on in-person verification became more widely accepted.
In the government subsidised health care sector, the pandemic highlighted the lack of flexibility in thedelivery of some services. The widespread take up of ‘telehealth’ consultations, access to which had beenheavily restricted under the Medicare Benefits Schedule funding guidelines prior to March 2020, showed awillingness amongst consumers to engage with telehealth across a variety of services.
From near zero uptake in late 2019, General Practitioner (GP) telehealth consults jumped to over 12 million
in mid-2020 — close to a third of total GP consultations (figure 2.17 panel a) (Snoswell et al. 2022). There
was a similarly large impact on mental health consults, including via video conferencing (figure 2.17 panel b).
The effect on quality of outcomes for telephone and video consults compared with traditional face-to-faceservice delivery is, at this point, unclear, although the potential benefits are widely documented (PC 2021a).

48

Forces shaping Australia’s productivity challenge

Figure 2.16 – Businesses are increasing their digital presence
Proportion of businesses that have placed and received orders on the internet
80
70

Businesses that placedorders via the internet

60
50
% 40

30
Businesses that received
orders via the internet

20
10

0
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: ABS (Characteristics of Australian Businesses, various editions, Cat. no. 8167.0).

Figure 2.17 – Funding changes and lockdowns led to a large jump in the number of
telephone and video consultations during COVID-19aa. General Practitioner consults (millions)b. Mental health consults (millions)

40

3.0

2.5

32

2.0
24
1.5
16

1.0
8

0.5

0

0.0

Video

Telephone

In-person

Video

Telephone

In-persona. Includes services provided by a GP, clinical psychologist, psychologist, occupational therapist or social worker.
Source: Snoswell et al. (2022).

49

5-year Productivity Inquiry: Keys to growth Inquiry report

Finding 2.14
Maintaining the gains in digital technology uptake through COVID
COVID-19 prompted an acceleration in the general uptake of digital technologies and showed that in acrisis, governments, businesses and households can adapt quickly. The challenge is for Australia toachieve a sustained productivity dividend following the pandemic by embedding the efficiency gains fromonline activity and services.

The nature of innovation is changing in a services-dominated economy
Innovation is about more than just high-tech research and development (R&D) laboratories generating new‘things’. And in an economy increasingly dominated by services, there is another, more immediately
practical, side to innovation — the process of changing the way a business operates. The former might
require specific, advanced technical skills (such as STEM), but the latter requires a combination of strategic
understanding, creativity, drive, risk appetite, emotional intelligence and adaptability. Both forms ofinnovation are fundamental to productivity growth in a modern economy.
The challenge for Australia is that, historically, innovation in goods-producing industries such as agriculture,mining and manufacturing has usually meant changes to production processes that are far removed fromdirect consumer interactions. But services sector innovation can be altogether different; for example, bychanging a user interface to improve customer experience and service quality.
While scientific breakthroughs feed into such innovations, they are only part of the story. The other partconsists of the diffusion, adaption and implementation of such breakthroughs to the needs of consumers andbusinesses. To achieve this, the exchange of ideas, some scientific, some business and most a hybrid of thetwo, may be much more important than a focus on the generation and commercialisation of research.
Pivoting the policy thinking on innovation as the economy becomes more dominated by services could bechallenging, but the past decade has brought a range of illustrative examples. Vehicle ride sharing apps,
online banking and telehealth are all examples of digital technologies being used to disrupt the way
consumers access some services. Returning to the Netflix example (box 2.2), online streaming services
completely replaced brick and mortar video rental stores. And in doing so, produced a much better product:
greater variety that can be accessed from their living room (or anywhere, via their mobile phone), at any time
and with no late fees and no waiting (for a DVD to be returned by another customer).
In addition, COVID-19 brought both business adaptation and widespread technology diffusion. Further to theincrease in online service delivery discussed above, there were notable examples of businesses rapidly
switching the nature of their production during COVID-19, including by changing both business models andbusiness activities simultaneously. Such changes were made to continue using capital equipment, keep
workers employed and provide an ongoing income stream. From distilleries that switched to making
alcohol-based hand sanitisers, to stage production companies that switched to construction of home officeequipment, the adaptability and resilience of private businesses was potently demonstrated.
Despite these past successes, Andrews et al. (2016) noted there is an increasingly large gap between firms
at the top and bottom of the productivity distributions, which the authors interpreted as being a defect within
the process of diffusing new innovative ideas. And some parts of the services sector face particular
headwinds; for instance, while government-funded services — such as health care and aged care —supported the diffusion of technology during COVID-19, their longer-term capacity to adapt their business50

Forces shaping Australia’s productivity challenge

models is fundamentally limited by their regulation and funding (volume 5). Finding ways to enable thesefirms and services to embrace innovations will be important for their future contribution to productivity.

Finding 2.15
Innovation in services may look different
Innovation in services industries is less about inventing ‘things’ and relies more heavily on diffusing ideas
and adapting business models. But this can be difficult for businesses operating away from theproductivity frontier, and in sectors where government funding and regulation have a heavy influence.

Data must be used, not just produced
Data has increasingly been used in recent decades to fine-tune and customise production and maintenanceprocesses and enable the creation of new models for business operation (box 2.2). Data use can improve
productivity by enabling more competition (as consumers make more informed purchase decisions) andincreasing allocative efficiency (as businesses and governments better direct resources to higher-value uses).
Deriving productivity dividends from the increasing data volumes produced in today’s economy and society
requires individuals, businesses and governments to use data to improve decision making. Effective use ofdata to improve productivity goes hand-in-hand with widespread adoption of the digital technologies thatdraw upon and ensure the safe use of data. But while Australia compares well internationally as a data
producer and consumer (Chakravorti, Bhalla and Chaturvedi 2019), it performs poorly in its use ofdata-driven technologies, such as artificial intelligence and data analytics (OECD 2022a, 2022b).
The COVID-19 policy response provided several good examples where data was effectively used to improvehealth and economic outcomes. There was a great need for consistent quality near-real time data to inform rapid
decision making in a range of public services (such as health, public safety and employee financial support) andcommercial services (including logistics and supply chain management). The challenge for Australia will be tobuild on this momentum and accelerate data use in other sectors and contexts, so that we can maximise thevalue gained from data produced in our increasingly digitised and services-oriented economy.
Volume 4 examines how Australia could get more value out its data holdings and further cash in on thedividend of digital technology.
Finding 2.16
Getting more out of our digital holdings
The large volumes of data produced by our increasingly digitised and services-oriented economy can beused to improve productivity. While there were good examples of effective data use during the COVID-19
response, Australia compares poorly internationally on use of data-driven technologies.

Access to skilled labour
The economic recovery from COVID-19 has been rapid, and this is evident in the current tightness of thelabour market. The unemployment rate has reached its lowest level in almost 50 years (panel a figure 2.18)
and the relationship between job vacancies and the unemployment rate is at an unprecedented point,51

5-year Productivity Inquiry: Keys to growth Inquiry reportsuggesting a very tight labour market (panel b figure 2.18). The fact that the employment to population ratio
is also at its highest level in 70 years — more than a percentage point higher than at the start of the
COVID-19 pandemic in early 2020 — suggests that the tightness may remain for some time.
Figure 2.18 – The Australian labour market is particularly tightb. The Beveridge curve for Australia

12

3.5

10

3

2020s

2.5

8

Vacancy rate (%)

Unemployment rate (%)

a. Unemployment rate (seasonally adjusted)

6

4

2

2010s

1.5
2000s

1

2

3.5%
(Dec 2022)

1990s

0.5
1980s

0
1978 1985 1992 1999 2006 2013 2020

0
3

6
9
Unemployment rate (%)

12

Source: ABS (2022d).

The scarcity of workers can be a spur to productivity improvement, creating strong incentives to invest in newcapital and innovate to make better use of labour. In this environment (and with inflationary pressuresevident) ensuring labour and other resources flow to their highest value use remains of critical importance.

A highly skilled workforce, proficient in non-routine cognitive tasks is evenmore valuable in a rapidly changing service economy
The Australian economy of a few generations ago — where manufacturing and agriculture accounted for nearly
half of aggregate production (Butlin, Dixon and Lloyd 2015) — had different skills and educational needs. Those
sectors provided relatively high average incomes with a workforce that was largely trained on the job, with fewer
requirements for formal education. As services (including high tech and human services) continue to expand as ashare of economic activity (and goods production increasingly requires highly skilled labour), jobs in the Australianeconomy increasingly involve non-routine tasks (figure 2.19). The diffusion of technology has supported thesetrends. AlphaBeta (2017, p. 13) estimated that about 70% of the ‘automation’ expected over the next 15 years will
involve automating tasks within jobs (rather than replacing entire jobs). The capacity of professionals and othervocations to perform tasks will be enhanced by in-time delivery of analytical insights and information.
While these non-routine services jobs often require more formal education in the first instance, the evolving
nature of the modern economy also means that the workforce needs to be able to easily upskill and reskill as
job roles change including because of the introduction of new technologies. Meeting this challenge requires
academic and vocational education systems that can provide the workforce with both solid foundational skills— such as the ability to problem solve and to think critically — as well as equipping workers with thespecialist (or vocational) knowledge required for specific roles.
52Forces shaping Australia’s productivity challenge

Volume 8 discusses the importance of quality education and training systems for providing skills andadaptability of the workforce.
Figure 2.19 – Non-routine roles are on the rise
Job types in the labour force (share of total)a45
Non-routine cognitive

Share of employment (%)

40
35

Routine manual

30
25

Routine cognitive

20
15

Non-routine manual
10
5
0
1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

a. Based on a mapping from ABS labour force to Australian and New Zealand Standard Classification of Occupations jobclassifications. Non-routine, cognitive: Managers, Professionals; Non-routine, manual: Community and Personal Service
Workers; Routine, cognitive: Clerical and Administrative Workers, Sales Workers; Routine, manual: Technicians andTrades Workers, Machine Operators and Drivers, Labourers.
Source: ABS (2022d,table 7); Leal, Lai and Rosewall (2019).

Finding 2.17
The future workforce will involve a different set of skills
A high skilled workforce is more important in an economy where jobs increasingly involve non-routine
tasks, and use of digital technologies and data manipulation.

Skilled overseas workers can support productivity
The Australian border has now reopened to migration after being closed for almost two years, which could help
satisfy the current unmet demand in the domestic labour market. However, tightness in the labour market is notunique to Australia. Labour markets in most advanced economies are at, or above, full employment. Thissuggests that Australia may face greater competition in attracting skilled labour post COVID-19.
Migration has long been a defining characteristic of Australian cultural and economic life. The benefits of
migration in a productivity context are numerous.
• Migration complements the education sector to supply skills to the Australian labour market. This allows
Australian firms to become more productive, by hiring the best available workers, but also increases
competition amongst employees, which can provide incentives for workers to improve their skills.

53

5-year Productivity Inquiry: Keys to growth Inquiry report• Migration can help to provide a diversity of skills and facilitate the diffusion of innovation, particularly
where foreign work experience helps Australian firms adopt global best practices, or where foreign
workers may be necessary to implement technology that is new to Australia.
• Migration can also play a role in filling skill gaps in occupations with standardised (competency-based)
licensing, or in regional areas that rely on either international or interstate migrants.
At the same time, migration can have unintended effects on productivity. Some businesses may face
reduced incentives to provide on-the-job training, while others may only seek migrant workers who will
accept lower wages (rather than improve the quality of output). And unexpectedly rapid population growththat is concentrated in particular areas can create congestion in the provision of some services, as well aspressure on infrastructure. Immigration should not be seen as the solution to every case where an employer
cannot find an employee at the prevailing wage.
Attracting the best and brightest migrants may be more difficult post COVID-19. Global migration patterns have
not returned to those observed prior to the pandemic and it is not guaranteed that Australia will remain as
attractive to working migrants as it was previously (CEDA 2015). Recent evidence suggests that enrolment
levels for international students in Australian universities (previously a source of considerable low skilled labourin the food services and hospitality sectors) may remain subdued in the near term (DESE 2022).
The number of skilled employees who are working overseas while undertaking tasks online for businesses
based in Australia may have increased during COVID-19 in line with the increased uptake of working fromhome. In the short term, this is an avenue to alleviate some existing labour market pressures, and in thelonger term — if its use by employers increases — it could lower the reliance on the formal skilled migration
system and have potentially significant implications for the way in which businesses access skilled labour.
Australia’s migration settings, and how they could be improved, are discussed in chapter 2 volume 7.

Finding 2.18
Tight labour markets mean that efficient allocation of labour is more important than everTight labour market conditions in Australia strengthens the need for workers to be allocated to theirhighest valued use. It also highlights the importance of access to skilled labour from other countries, which
can help alleviate demand pressures and enhance productivity by improving the quality and diversity ofskills in the labour market.

The challenges of climate change and decarbonising the economy
Climate change and the associated need for decarbonisation of the Australian economy could dampen future
productivity growth, particularly if the transition is not appropriately managed.
Climate change itself poses a threat to the Australian economy through various channels, and by somemeasures this threat may be larger than for other major economies (figure 2.20). These risks are mostpronounced for industries that depend directly upon the natural environment as a key input, such as
agriculture, tourism and construction. The ways in which these industries adapt to the effects of climatechange will influence their potential for productivity growth — a challenge compounded by the continued
effects of past carbon emissions.

54Forces shaping Australia’s productivity challenge

The need to decarbonise the economy over a relatively short timeframe has implications for productivity. On
the one hand, it reduces a production cost (carbon emissions) but could also reduce measured productivity
growth due to:• the costs associated with developing and implementing new technologies to achieve decarbonisation (forexample, replacing fossil fuel-based energy generation with alternative sources — effectively investment
to replace, rather than increase, the economy’s existing capital stock)• the move away from some existing low-cost production methods (for example, switching away from using
coal to produce steel)• reducing production of goods that do not have carbon-free production methods (for example, if nocarbon-free fuel sources are found for commercial flights).
These costs need to be balanced against the benefits of decarbonising the economy in line with Australia’scommitment to net zero emissions by 2050. The policy challenge is to ensure that the process ofdecarbonisation is undertaken in the most cost-effective way.
This task is made more difficult by the considerable uncertainty about the cost of reducing emissions (orfailing to reduce emissions enough), the desirable pace of decarbonisation and the lowest cost method ofachieving it. Technologies and methods of decarbonisation will need to be developed and selected in anenvironment where full knowledge of the associated costs and benefits will only be apparent in the future.
Volume 6 discusses how Australia could achieve net-zero carbon emissions at least cost.
Figure 2.20 – Australia’s comparative preparedness for a low-carbon transitiona
Economic exposure and resilience to transitional risk in Australia and OECD countries
0.7

0.6
CRI
PRT
HUN
ITA
SVN
SVK
LVA
ESP CZE

Resilience

0.5
0.4

LTU

0.3

COL
GRC
TUR MEXCHLPOLISR CAN
EST
FRA
BEL
IRL
AUS
JPN KORAUTFIN SWE DNK USA
DEU

0.2

NZL

NOR

CHE
GBR

0.1
0

0

0.05

0.1

0.15

0.2

0.25
Exposure

0.3

0.35

0.4

0.45

0.5

a. OECD country abbreviations are: Australia (AUS), Austria (AUT), Belgium (BEL), Canada (CAN), Chile (CHL),
Colombia (COL), Czech Republic (CZE), Denmark (DNK), Estonia (EST), Finland (FIN), France (FRA), Germany (DEU),
Greece (GRC), Hungary (HUN), Iceland (ISL), Ireland (IRL), Israel (ISR), Italy (ITA), Japan (JPN), Korea (KOR), Latvia(LVA), Lithuania (LTU), Luxembourg (LUX), Mexico (MEX), Netherlands (NLD), New Zealand (NZL), Norway (NOR),
Poland (POL), Portugal (PRT), Slovak Republic (SVK), Slovenia (SVN), Spain (ESP), Sweden (SWE), Switzerland(CHE), Turkey (TUR), United Kingdom (GBR) and United States (USA).
Source: Peszko et al. (2020).

55

5-year Productivity Inquiry: Keys to growth Inquiry report

Finding 2.19
Climate change is a productivity challenge
Climate change presents risks to the Australian economy, especially for industries that utilise theenvironment as a key input. Selecting forms of abatement and mitigation to cost effectively achieve
Australia’s net zero by 2050 commitment will be challenging given the inherent uncertainty about futuretechnological breakthroughs.

Vulnerability to international headwinds
As a small economy, Australian businesses and consumers are heavily reliant on, and have benefitedenormously in the past from, foreign investment and trade. Much of our agricultural production (beef, wool,
wheat, forestry and fishery products) and resource and energy outputs (such as iron ore and coal) havebeen sold on global markets. Many of our consumer goods (from televisions to toasters to smartphones tooverseas holidays and clothing and footwear) and production inputs (including those in the form of the latest
technologies embodied in capital) have been brought in from overseas (figure 2.21).
Figure 2.21 – Australia is heavily reliant on resource exports, but imports are balanced
across a range of consumer and business goods and services
a. Composition of exports (% share of total)b. Composition of imports (% share of total)

7030Resources
60

Industrial Supplies

Agriculture

Services

25

50
20

Capital
Goods

40
15

Consumer Goods

30
Services
10

20Transport
equipment

10
0
1960

Manufactures
Other
1970

1980

Fuels &
Lubricants

5

0

1990

2000

2010

2020

1980

1990

2000

2010

2020

Source: RBA based on ABS (2022b, tables 1, 5, 6 and 10).

Historically, Australia’s domestic savings have been insufficient to fund the numerous investment opportunities
available, and we have typically run a current account deficit. For this reason, Australia has relied on foreign
investment to fund infrastructure and other capital, which has allowed the economy to grow faster than our
relatively small pool of domestic savings would otherwise have allowed. Even to the extent Australia can meet56

Forces shaping Australia’s productivity challenge

its overall capital needs27 using domestic savings, foreign investment is still desirable because it brings newexpertise, innovations and novel types of capital to Australian firms. Investment, domestic and foreign, willcontinue to be critical enablers of growth in Australian living standards into the future.
Recent global developments could add to the productivity growth challenge. The reappraisal of supply chain
risks could see firms incur costs to achieve greater certainty. Global tensions have disrupted trade flows, addedcomplexity to foreign investment policy and led to a degree of technological decoupling. All these effects could
add costs and impede productivity growth to some extent. They could be compounded by policy responses thatfurther move away from openness and multilateralism. Australia has not always been as open as it is today.
Following Federation, the newly created Australian Government embraced protectionist policies: erecting tariffs,
protecting manufacturing, centralising wage arbitration and adopting the White Australia policy. The latter two
had the effect of reducing labour market flexibility and the size of the potential pool of foreign labour that could
be accessed, while tariffs had the effect of ‘taxing’ both domestic consumers and other Australian exporters28
while also reducing the incentives for productivity improvement in trade exposed- industries.29
For a while, any negative effect of ‘Fortress Australia’ on living standards was not obvious in the aggregate
statistics. Strong global demand for Australian resources meant that prosperity could be found via a ‘ride on
the sheep’s back’. But from the 1950s onward, Australia’s productivity performance consistently lagged theOECD, and Australian living standards began to fall relative to our peers: in 1950 Australia was ranked 5th in
the world in terms of GDP per person, but it was 9th by 1973 and 15th by the late-1980s (Banks 2005). Suchmovements in relative rank reflect both domestic policies — several studies have argued that the fast
productivity growth experienced by Australia in the 1990s can be linked with the preceding microeconomic
reforms (including significant trade liberalisation) (Parham 2004; PC 1999) — as well as a host of factors
unrelated to domestic policy (not least of which is catch up from a number of other economies).
‘Fortress Australia’ was born of a time of increased global instability and deep scepticism of reliance oninternational trade and capital flows for economic development. It highlights the economic (and cultural) costs ofturning inwards, still relevant in a world where external threats — threats to national and cyber security, criticalsupply chains to name a few — seem abundant. Chief among these costs is that it can create powerful, often
mutually reinforcing, avenues for rent seeking that are difficult to unwind once created.30
This policy episode has clear parallels with the contemporary international trade environment. Disadvantage
in areas affected by trade liberalisation, increasing political tensions between major global powers and aseries of supply-side disruptions resulting from the COVID-19 pandemic appear to have cooled enthusiasm
for multilateralism. The challenge for Australia moving forward will be to maintain the stance of unilateral free
27 Australia has run a current account surplus since September 2019 — the first surplus since 1975 — on the back of anelevated terms of trade.
28 Tariffs have the effect of decreasing demand for foreign imports, which reduces the demand for foreign exchange andappreciates the domestic currency. This makes Australian exports less competitive, effectively placing a ‘tax’ on them
(Dornbusch 1974; Furceri et al. 2018).
29 Trade openness improves productivity growth through a number of channels: i) increased competition leading toresource allocation away from unproductive firms and towards productive ones; ii) increased market size for exporting
firms raises the return on both developing and adopting new innovation; and iii) increased economic integration creates
more opportunities for knowledge flows, leading to faster diffusion of innovation (Acemoglu and Linn 2004; Crespi,
Criscuolo and Haskel 2008; Melitz and Trefler 2012).
30 For example, early in the Fortress Australia period, there were instances where an industrial court (one of the key
components in centralised wage arbitration) would increase minimum wage requirements for import-competing firms,
who would then lobby for governments to increase tariffs to preserve their profitability. However, higher protectionism
itself was then often used as an argument to increase minimum wages by industrial courts, leading to a spiral of evergreater protectionism (Wilson 2014).
57

5-year Productivity Inquiry: Keys to growth Inquiry reporttrade that has been demonstrated as the best policy response even when other countries increase theirtrade barriers (PC 2017a, p. 79).
Chapter 3 volume 3 discusses how Australia trade and foreign investment policy should evolve in light ofincreased global tensions.

Finding 2.20
The opportunities of a service-based economy
As an increasingly services-based economy, Australia can benefit from greater global trade andintegration in many service industries.

58

Appendix

Appendix59

Productivity and how it is measured

A. Productivity and how it ismeasured

A.1

What is productivity?

Recall the definition of productivity given at the start of section 1.2 in chapter 1:]

Output

]

Input

=

Productivity

EqualsThis raises the question: what should be treated as inputs and what should be treated as outputs? How thisquestion is answered creates different methods of measuring productivity. The most commonly reported
measures of productivity are ‘labour productivity’ (the ratio of output to the number of work hours used in
production) and ‘multifactor productivity’ (the ratio of output to a combination of both hours worked andcapital). The difference between the two is the definition of ‘inputs’. Output always refers to the production of
goods and services minus the value of goods and services purchased from other firms, or ‘gross value
added’. At the whole economy level, ‘output’ is gross domestic product (GDP). Box A.1 contains a stylised
example of labour productivity.

Box A.1 – Jared and the chocolate factory: a stylised example of labour productivity
Jared works in a chocolate factory. Jared’s boss, Colin, wants to measure the labour productivity of his
workforce to make operational improvements at the factory. Colin estimates that during a 40 hour work
week, Jared produces 2000 chocolate bars. Colin calculates Jared’s labour productivity as:
Output2000
chocolate bars

=

40
Input

50
chocolate bars

overEqualsper hourLabourproductivity

hours worked

While this allows Jared’s performance to be compared with other employees in the chocolate bar branch,Colin cannot compare Jared to employees in the chocolate biscuit division. To allow for comparison,
Colin notes that chocolate bars each sell for $2 and Jared produces 2000 of them, so the total value of61

5-year Productivity Inquiry: Keys to growth Inquiry report

Box A.1 – Jared and the chocolate factory: a stylised example of labour productivity
Jared’s production is $4000. Using this instead of just the number of chocolate bars, Colin calculates
Jared’s labour productivity as:
Output$4000
est gross value

=

over

40
Input

Equals$100
gross value
add

Labourproductivity

per hourhours worked

In this report we are interested in the enablers of productivity growth, which cover a broad range of actions byfirms and individuals, as well as policy and institutional settings. For statistical purposes, we often divide
productivity growth into two (slightly stylised) categories: capital deepening and multifactor productivity (MFP).
• Capital deepening is the process of investing to increase the stock of buildings, machines and intellectual
property relative to labour. Capital deepening accounts for about 45% of labour productivity growth since
1901 (figure A.1).31• Multifactor productivity describes how productively firms combine both capital and labour and accounts forabout 55% of labour productivity growth since 1901.
The distinction between these two sources of growth is clearer when considered from the perspective of acompany and the business manager. A business manager has a choice in how much ‘capital’ (machinery,equipment and buildings) to allocate to each employee. For example, the manager of a retail store must
decide how many automated checkouts to install for each checkout employee. As the number of automatedcheckouts increases, each employee is more productive (the number of customers served, and the value of
output generated per day, rises) as they no longer have to scan and bag grocery items, but can instead
concentrate on troubleshooting when the automated checkouts make mistakes. So, each additional
automated checkout machine raises the labour productivity of each existing checkout worker.
This process of increasing the ratio of capital (in this case automatic checkout machines) to labour (checkout
staff) is called ‘capital deepening’. Eventually, as the number of machines per employee increases beyond acertain point, the additional profit created by each machine will fall. This could be because staff cannot, in atimely manner, supervise an ever increasing number of machines when mistakes occur, giving rise to‘diminishing returns’.

31 Based on estimates of labour productivity, GDP per capita and MFP in the Long-Term Productivity Database. Notethat this dataset uses capital services that impose a constant (exogenous) rate of return on different kinds of capital,
which differs from capital services measures used by modern statistical agencies.
62

Productivity and how it is measured

Figure A.1 – Australian labour productivity growth due to capital deepening and MFPa
Index (1901=100)
800
700

600
500
400
300
200
100
0
1901

1910

1919

1928

1937

1946

Capital deepening

1955

1964

1973

MFP

1982

1991

2000

2009

2018

Labour productivity

a. Capital deepening is the difference between growth in labour productivity and growth in MFP.
Source: Bergeaud, Cette and Lecat (2017).

If the retail manager rearranged the machines, or perhaps added signals that quickly alerted staff about
malfunctioning machines, this would make the staff and the machines more productive. This is an example
of an MFP improvement. Once this is done, it then becomes profitable to add even more automatic checkoutmachines per staff member. That is, as the MFP of the store increases, the more profitable capital
deepening becomes.
In many ways, the distinction between capital deepening and MFP is stylistic — a simplification of a highly
complex real world process. It is but one lens through which to view the path of productivity growth. But it
can shed some light on sources of past productivity growth in the Australian economy.
MFP growth can come from a number of sources, including the introduction of new technology in the
production process, and redesigns of the systems of production (for example, changing the physicalorientation of factories or the structure of supply chains). If there is an increase in MFP, then this means the
profitability of new capital (machines, equipment etc) increases and so businesses invest more, leading to anincrease in the amount of capital per employee in the economy (the capital to labour ratio). In this way, an
increase in MFP encourages more capital deepening, making MFP growth a necessary condition for continued
labour productivity growth as it pushes out the point of diminishing returns on new capital.
The various measures of productivity are summarised in box A.2.

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5-year Productivity Inquiry: Keys to growth Inquiry report

Box A.2 – How do we measure productivity?
What do all measures have in common?
There are many ways to measure productivity, but they all compare the ratio of output produced by firms
to the inputs used. Where they differ is in the particular inputs and outputs that are examined and whether
market prices or other methods are used to weight particular products and inputs.
Labour productivity and quality adjusted labour productivity
Labour productivity is a commonly produced, intuitive measure of productivity. It is the ratio of output(usually measured as gross value added derived in respective countries’ system of national accounts) tothe number of hours worked (labour) to produce this output. A complementary capital productivity measure
is more difficult to produce, because capital services data is often harder to collect (and harder to compare
across time and across countries). Labour productivity is often used for cross-country and cross-industry
comparison, and is more easily available than multifactor productivity measures.
In addition to calculating labour productivity using labour hours, some statistical agencies also calculatequality adjusted labour hours by weighting the growth in labour hours in different occupation-skill
combinations by their different wages. This has the effect of giving higher weight to growth in hours worked
in occupation-skill combinations that demand higher wages.
Multifactor productivity
Multifactor productivity (MFP) measures the ratio of output to a combination of labour and capital services.
Generally, MFP is calculated as a growth rate and the growth in combined inputs is the weighted averageof labour hours and capital services growth with the labour and capital shares of income being used as theweights respectively.
Capital services are typically calculated as a weighted average of growth in different capital assets withdifferent asset types in different industries given different weights based on market profits, depreciation
rates and several other factors. Because these weights are different for different countries in different
years, it makes levels comparisons of MFP across countries (or industries) difficult.
KLEMS productivity
When calculating labour productivity or multifactor productivity, the measure of ‘output’ is typically the valueof goods and services produced by a firm (‘gross output’) minus the goods and services they bought fromother firms (‘intermediate inputs’), which is referred to as ‘gross value added’. An alternative is to use gross
output as the measure of output and add intermediate inputs as an additional input along with capital andlabour. KLEMS productivity measures take this a step further and split out the intermediate inputs into
services, materials and energy. The advantage of this approach is that it gives insight into how a particularindustry uses the energy, materials and services of other firms to produce its output. A major disadvantage
is that KLEMS analysis only makes sense at an industry or firm level because at the whole economy level
there are no ‘intermediate’ inputs only capital and labour.
Non-index methods
The above measures of productivity are referred to as ‘index methods’ and are the approaches used bynational accounts agencies. While these methods are well suited to the measurement of aggregate
progress, they have the shortcoming that they require market prices to weight different goods andservices. Certain ‘non-market’ services such as public services, health care and education are often

64

Productivity and how it is measured

Box A.2 – How do we measure productivity?
provided at free or discounted cost due to extensive government subsidies and so using national
accounts methods is not appropriate.
For these services, economists often use alternative methods to measure productivity such as Data
Envelopment Analysis, Stochastic Frontier Analysis and several others. These methods compare
productivity of firms by focusing on a narrowly defined industry and rather than using prices and costshares to weight different outputs and inputs, they make assumptions about the way different inputs andoutputs can be combined by firms (as well as about how random noise and productivity improvements
can be separately identified). For example, an economist might create a stochastic frontier model byassuming firms have constant returns to scale and use a Cobb-Douglas production function with therelative efficiency of firms being half-normally distributed. These assumptions may be strong but they
remove the need to have market prices to compare firms within narrowly defined industries.
Source: Sickles and Zelenyuk (2019).

A.2

The elusive quest for the causes of growth

The past 70 years have seen the development of numerous ‘growth’ models that attempt to explain theunderlying drivers of economic growth (and hence, productivity) at the aggregate level.
The task has several challenges. First, it is an attempt to explain what (many) economists regard as an‘unexplained residual’ — that is, the observed tendency for output to grow by more than can be accounted
for by the growth in capital and labour inputs. Second, it is an attempt to sum up in a single variable (or veryfew) the underlying cause or driver of growth, whereas in reality growth comes from multiple, disparate,
uneven processes.
Candidate variables have included capital accumulation, an externally determined rate of technologicaladvance, improvements in human capital, and the generation and sharing of ideas that add cumulatively tothe stock of knowledge across the economy.
While such models have been used to explain some of the massive divergence in economic growthexperienced across countries and time, none of them completely succeeds in predicting or, even ex-post
explaining, the rates of growth of most countries. And in most cases they are of limited use as a guide forcomparing specific policies. In particular, they are not a substitute for rigorous project evaluation and costbenefit analysis of government programs. But the aspects of economic growth they do manage to explainand — often more importantly — the aspects they do not manage to explain reveal much about both thenature of economic growth itself and the strengths and limits of formal models in identifying the underlying
drivers of the growth process.
There are some key takeaways from these models.
• Once a country achieves high income status, all further economic growth will tend to be driven by a‘residual’ term — multifactor productivity — which includes the effects of innovation (technologicalprogress) and better resource allocation (Aghion and Howitt 1998, p. 16, 2009, p. 39). However,explaining the source of innovation was the main gap in older economic models.

65

5-year Productivity Inquiry: Keys to growth Inquiry report• The MFP residual is partially due to the steady acquisition of skills and experience by the workforce.
Known as ‘human capital’, this also captures the direct effect of formal education (Lucas 1993; Mankiw,
Romer and Weil 1992).
• Some early models emphasized the role of a common stock of scientific knowledge, produced throughpublic funding of research, as underpinning, or enabling, private innovation (Arrow 1962a; Nelson 1959).
• Other models of growth emphasise the role of ideas more broadly in explaining residual MFP growth.
Because one’s use of an idea does not prevent others from also using it (ideas are ‘non-rivalrous’) thestock of ideas can grow exponentially (Arrow 1962b; Romer 1986). Some of these ideas are generated via
a process of ‘learning by doing’ and are often embedded in new capital (Arrow 1962b), but markets may
undervalue the provision of this learning and so less is achieved than socially desirable.
• More recent growth models emphasise the process by which knowledge is shared across an economy,
highlighting that the transfer of knowledge is not an automatic process (Lucas 1993).
• Another class of models emphasise ‘creative destruction’, an ongoing process characterised by new
innovations leading to the replacement of older products and production techniques (Aghion and Howitt 1992).
These models implicitly embrace the unevenness and unpredictability of productivity growth, highlighted inchapter 1 as a central driver of MFP growth, and as an explanatory factor for differences in income levels
between economies. There are various explanations for how creative destruction occurs and its nature.
– Markets provide price signals about the value of innovation and the design of market structures canmoderate the strength of this signal (Aghion and Howitt 1998, pp. 205–225).
– Education plays an indirect role in lowering the cost of undertaking or engaging with innovation (better
educated workers can more easily adopt and improve on new scientific concepts in an applied setting)(Aghion and Howitt 1998, pp. 327–356).
– The closer an economy comes to the technological ‘frontier’, innovation efforts should focus less on‘catching up’ and more on novel breakthroughs to drive continued growth (Aghion and Howitt 1998,
pp. 67–69).
• Some newer models also emphasise the role of general purpose technologies (GPTs, such as steam
power or electricity) to drive rapid, prolonged periods of productivity growth (Bresnahan 2010; Bresnahan
and Trajtenberg 1995; Bryjolfsson, Rock and Syverson 2018).
– The information and communications technology (ICT) revolution was the most recent example of a
GPT. Some suggest that newer digital technologies (such as artificial intelligence) will be the next GPT(Brynjolfsson, Rock and Syverson 2017).
• Institutional settings that underpin markets are an important ingredient that influence the pace of economic
and productivity growth by encouraging and rewarding risk-taking and providing a test bed for ideas via
price signals and the free flow of resources across the economy (North, Wallia and Weingast 2006).
Some papers even question whether productivity growth is even exponential. For example, Philippon (2022)
has found that a linear model of multifactor productivity appears to fit the data better than a geometric model,
implying that slowing multifactor productivity growth is not a bug so much as a feature of the economic
system itself. This might be the case, for example, due to the accumulation of ideas itself inherently following
an additive, rather than multiplicative, process.

66

Productivity and how it is measured

A.3

Changing prices make productivity measurement
challenging

Measurement of real productivity (and GDP) growth is complicated by changing prices. More straightforward
is the measurement of nominal productivity growth, which only requires adding up the total dollar value ofgoods and services produced in the economy and dividing by some measure of inputs (usually number ofhours worked).
Constantly changing prices creates problems for productivity measurement because prices are used toweight the importance, or value, given to a particular good or service. If a product has a high price, then it
receives a high weight under the assumption that this product is valued highly by consumers. But what if a
product has a high price in one year and a low one in the next? Which set of prices should be used? The
first or the second year’s prices?
A simple solution is to use the prices from the first year to weight goods produced in the first year and prices
from the second year to weight goods produced in the second year. But this approach has two issues. First, it
ignores ‘inflation’, the general increase in the price level of goods and services. To see why this is problem,
imagine all goods and services uniformly increased in price by 2% between the first and second year. If theprices for the first year are used to weight goods in the first year and prices in the second for products in thesecond year, then this will lead to productivity measures also increasing by 2% even if actual production
remained unchanged. This is because all of the prices will increase by 2% even if the quantity does not. The
second issue is that this approach does not deal with the issue of products that are lacking prices either in thefirst period (because the product was invented in the second period) or in the second period (because theproduct became obsolete in the second period after being replaced by a new product).
The various measurement challenges for productivity created by changing prices can be grouped into a few
distinct types:• substitution bias — when the price of a good changes, should we use the old price or the new price? As
discussed below, the answer turns out to be somewhere in the middle• outlet bias — the emergence of discount outlets create issues as to which price (the common retail priceor the discount price) should be used to weight a particular good• quality and new product bias — new products or products whose quality has improved have the challengeof not having past prices. Likewise, products that are no longer sold had prices in the past but no longer
have them.
Each of these challenges and their consequences (and potential solutions) for productivity measurement will
be discussed below.

Substitution and outlet bias
Substitution bias is the potential to over or underestimate inflation (and hence productivity) because ofchanging relative prices. To understand substitution bias, consider a simple example involving apples andoranges: both apples and oranges were $2 last year but now apples have risen in price (perhaps because of
a flood) to $4 while oranges are still $2. If we use the first year’s prices in both years, this will tend to underweight apple production in the second period and if we use the second year’s prices, this will tend to overweight apple production in the first year. In either case, productivity and inflation will be mismeasured.

67

5-year Productivity Inquiry: Keys to growth Inquiry report

A good way to solve this issue is to take the geometric average of the two prices.32 Such a measure of prices iscalled ‘superlative’, meaning it is symmetrical between prices of the two periods (Hausman 2003, pp. 33–35).
Another approach to mitigate substitution bias is to have more frequent collection of data on prices and quantities.
Outlet bias refers to the potential bias caused by the existence of discount outlets that offer almost identicalproducts at lower prices. Unlike substitution bias, this issue cannot be resolved using a different formula tocalculate the weights given to particular goods. Instead, more frequent and detailed collection of price andquantity data for both outlet and non-outlet stores is necessary (Hausman 2003, pp. 32–33).

Quality improvements and new products
The consumer benefits of both quality improvements and new products were discussed previously(chapter 1). The reason these two kinds of improvement are often underestimated in productivity statistics isthat both require statistical agencies to know the size of the consumer welfare gain (or ‘consumer surplus)
due to either the quality improvement or the introduction of a new product/variety. However, these welfare
gains cannot be inferred from the changes in prices alone, information is needed about how muchconsumers would have been willing to pay for either the quality improvement or the new product (which istypically more than the current market price) (Hausman 2003, pp. 25–32).
Box A.3 gives an example of the issues created by the introduction of new products.

Box A.3 – Why do new products present problems to GDP measurement?
Quality improvements and the introduction of new products present no problems to the measurement of
nominal output and productivity but can distort measures of real (inflation adjusted) output. In order tounderstand how, consider how chain-weighted GDP growth (the most common method) of GDP is calculated:
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ =∑ 𝑝𝑗0 𝑞𝑗1
∑ 𝑝𝑗0 𝑞𝑗0

∗ 100 − 100

Where p are prices of a product, q are the quantities of products, j is the subscript for a particular productand superscript 0 and 1 refer to periods 0 (yesterday) and 1 (today).
In order to calculate the growth in production between two periods of time, the price of all j products
needs to be known for the first period. But for goods that did not exist in the previous period either
because they are new products that were introduced in the current period or because their qualitychanged enough that the prices at their previous levels of quality are not appropriate, this creates the
problem of what price to apply.
A case where a whole new product is introduced is shown in the table below. Here only apples andwidgets were ever produced, with widgets being invented in the second period and not existing in the first
period. This means there is no market price for widgets for period zero and so it is unclear how to
calculate real GDP. Improvements in quality that are not incorporated in prices create similar issues.

32 The approach of using the first year’s prices as weights is called a ‘Laspeyres’ index while using the second year’s

prices is called a ‘Paasche’ index while using the geometric average of the two is called a ‘Fisher’ index.
68Productivity and how it is measured

Box A.3 – Why do new products present problems to GDP measurement?
Example of introduction of new products
Widgets

ApplesNominal GDP

Price ($)

Quantity

Price ($)

Quantity

Period 0

?

0

1

10

10

Period 1

2

2

1

5

9

Growth

-

-

-

-

-10%

Looking at nominal GDP growth, it would look like GDP fell but how do we know if this is also true of real
GDP? One approach, is to determine what the price of widgets would need to have been in period 0 in
order for the quantity consumed to be zero. Under this approach, say we determined that based on
observed demand this price would have to be $10 per widget. In this case, we can calculate real GDP as:
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ = (10 ∗ 2 + 1 ∗ 5)/(10 ∗ 0 + 1 ∗ 10) ∗ 100 − 100 = 150%
So once the price of the new good is properly accounted for, real GDP actually increased substantially
due to the introduction of the new product.

What is the net effect of these price-related measurement
challenges on wages growth?
Beginning with the Boskin Commission, a range of papers and public inquiries have examined the effect ofvarious measurement issues on estimates of consumer prices (table A.2). With the exception of substitution
bias, most of these issues in the measurement of consumer prices pass onto issues in the measurement of
productivity (box A.4); however, all of the studies considered here are for estimates in the United States (US)economy. It is unlikely that Australian estimates differ significantly for consumer prices but they may withrespect to productivity (consumer product sales tend to be more similar across advanced economies than
production patterns due to international trade of consumer goods). The only Australian estimate of consumer
price index bias that can be directly compared with the United States estimates are those of ‘upper level’substitution bias. According to the ABS, this was about 0.22 percentage points annually between 1995-96
and 2015-16, which is broadly similar to the range of 0.15-0.3 percentage points estimated for the US(ABS 2017; Moulton 2018, p. 31).33
Assuming estimates of the bias in the consumer price index for the US due to quality improvements and theintroduction of new products are applicable to Australia (say at the lower end of the range, about 0.37
percentage points per year), then this implies that Australian wage growth over the past twenty years (June2001 to June 2021) was about double its measured amount — measured real wages (the wage price index
deflated by the consumer price index) rose about 20%, while mismeasured quality means real wages may
have grown by about 38%.34

33 ‘Upper level’ substitution bias refers to substitution bias between broad classes of products, say apples and oranges.

While ‘lower level’ substitution bias refers to substitution bias between more granular classes of products say between
different types of apple.
34 Calculations using ABS (2022a, 2022e).
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5-year Productivity Inquiry: Keys to growth Inquiry report

Assuming that all the sources of bias listed in table A.2 are applicable to the Australian consumer price index
over the past twenty years (June 2001 to June 2021), then real wage growth may have been about 52% overthis period, or about one and a half times as much as the published estimates.
These kinds of direct calculation cannot be performed for productivity due to differences in the way that the
GDP deflator and consumer price index are calculated. Nonetheless, it is likely that if these estimates of themismeasurement of consumer price index inflation due to quality improvement/new products are accurate,then productivity is likely underestimated by a similar margin to real wage growth.
Table A.2 – Estimates of the degree of overestimation of the consumer price index due
to quality mismeasurement and other sourcesa
Bias in the CPI due to quality/new products, outlet bias, substitution bias and total bias
(percentage points)
Quality andPaper

new products

Outlet bias

Substitution bias

Total CPI bias

Percentage

Percentage

Percentage

Percentage

pointspointspointspointsBoskin Commission (1996)

0.6

0.1

0.45

1.1

Lebow and Rudd (2003)

0.37

0.05

0.35

0.85

Gordon (2006)

0.4

0.1

0.4

1.0

Moulton (2018)

0.37

0.08

0.3

0.87

0.37-0.6

0.05-0.1

0.3-0.45

0.85-1.1

Total range

a. Substitution bias adds the estimated effects of both ‘upper’ and ‘lower’ level substitution bias.
Source: Boskin Commission (Boskin Commission 1996); Gordon (2006); Lebow and Rudd (2003); Moulon (2018).

Box A.4 – CPI vs the GDP deflator: why mismeasured consumer prices do not always
lead to mismeasured productivity
Why is there more than one measure of aggregate price changes?
Above it was discussed why estimates of productivity growth and economic growth more broadly need tobe adjusted for changes in prices. Loosely speaking, the changes in prices of goods and services overtime can be aggregated into a single measure that tries to capture the average change in prices acrossthe economy, which is referred to as a measure of ‘inflation’ (price growth).
There are two main kinds of ‘inflation’ that are of most interest: changes in the prices of goods producedin Australia and changes in the prices of goods most commonly consumed by Australians. Generally, theformer is measured using the ‘implicit GDP deflator’ while the latter is measured using the ‘consumer
price index’ (CPI).
How does this affect productivity growth?
The GDP deflator is used to convert nominal (not adjusted for price changes) measures of productivity
into ‘real’ (price change adjusted) measures of productivity while the latter is used to (among many other70

Productivity and how it is measured

Box A.4 – CPI vs the GDP deflator: why mismeasured consumer prices do not always
lead to mismeasured productivity
things) convert nominal measure of wages into real measures of wages. So while the flaws in themeasure of CPI discussed in this section have a one-to-one effect on the measurement of consumer
prices they do not always affect measured productivity. There are two reasons for this. First, the GDP
deflator has a different basket of goods to the CPI; the GDP deflator contains all the goods and services
produced in the Australian economy while the CPI has only the prices of the most commonly consumer
goods and services. Second, the methods use different formulas to assign weights to different goods andservices and update those weights at different intervals.
The overall effect of these differences on the mismeasurement of productivity compared with themeasurement of consumer prices is difficult to determine and no systematic attempts have been made toestimate this difference.
Source: ABS (2015, 2019a).

A.4

The impact of measurement error

Productivity growth not coinciding with increased individual wellbeing can result from flaws in the way
productivity is measured. These measurement issues include:• non-market production — home cooked meals, looking after one’s own children, cleaning one’s house andundertaking own repairs of property all produce goods and services valued by individuals but they are notrecorded in GDP or productivity statistics. This can become an issue where government policy reduces
non-market production and increases market production but with a potentially ambiguous effect on wellbeing• marginal verses average — productivity growth cannot always distinguish between the marginal and theaverage. For example, if a barrier to labour force participation is reduced and the result is that a previously
marginalised group of people join the labour force this might reduce average measured productivity if the
productivity of this new group of workers is lower than the economy average. However, if this group ofpeople had previously wished to work but were prevented from doing so due to discrimination, then thislikely enhances welfare and the economy itself while reducing measured productivity• stocks verses flows — productivity and GDP measure the flow of new goods and services being produced
but they do not account for the destruction of existing assets. So for example, in some circumstances, anatural disaster, or wars, can (assuming it does not severely damage the productive capital stock) actuallylead to an increase in measured GDP and productivity growth but are clearly hugely destructive toindividual and economic wellbeing• utilisation of inputs — while capital stocks can be measured with a reasonable degree of accuracy,
measuring the degree to which this stock is being productively utilised is very difficult. As a result,statistical agencies typically assume the capital stock is being fully utilised, which tends to result in
productivity being underestimated during recessions (when capital utilisation is falling) and overestimatedin economic recoveries (when utilisation is rising). A similar issue arises in measuring mining productivity
where measured capital services increase steadily as a mine is being built rather than when the mine ismade operational, leading to underestimation of productivity in periods of heavy mining investment andoverestimation in subsequent periods of heavy extraction71

5-year Productivity Inquiry: Keys to growth Inquiry report• sensitivity to environmental factors — agricultural, mining and transport productivity are all affected by thestate of the natural environment. For example, whether there is heavy rainfall or drought in a particular
year will have a strong effect on agricultural productivity. Likewise, the productivity of mining can dependon how difficult it is to extract particular deposits• quality changes and new goods — the bias created by new goods and quality improvements to
productivity measurement were discussed in chapter 1.

A.5

Projecting the growth of the non-market sector in a
simple model

The growth of the non-market sector is likely to have significant consequences for Australian productivity
growth into the future. One way to try and understand the productivity growth impact is to model different
non-market sector growth scenarios with its productivity relatively stagnant.
The model presented in this appendix uses a simple stylised model of the economy with only two sectors —market and non-market — to show that, depending on assumptions made about consumer preferences,continued productivity stagnation in the non-market sector (even in the presence of strong productivity
growth in the market sector) is likely to drag on aggregate productivity growth.
The types of consumer preferences analysed are all relatively simple in the sense that only the relative prices
of market and non-market products change consumption behaviour — so long as relative prices stay constant,income has no separate effect on relative non-market services consumption. This is likely an oversimplification,
as there is likely an independent effect of income on relative consumption of non-market services as well but
inclusion of this effect would likely reinforce rather than weaken the findings presented here.
This model also abstracts from the issues of capital and trade, which would likely also be impacted by therise of the non-market services sector.
This model is a variant of one presented in Vollrath (2019) and Jones (Jones 2020) that both drew inspirationfrom the works of Baumol (Baumol 1967, 1982) on cost disease.

The model
Production
There are two sectors, market (M) and non-market (N) that each produce a single output (Y). Each use ashare of homogenous labour (L) which they use as their sole input and have an assumed rate of labour
productivity in any particular period (A) [this has been set based on the historical rate of 1.66% in the market
sector and zero for the non-market sector]. In this model, all output is consumed immediately (no investment)
and the economy is closed (no international trade).
Intuition: in this model, only labour is used in production so the only thing determining relative prices of
products is how much labour they need. Under the assumption that labour is paid the same no matter where
it works, the market sector requiring less and less labour as its productivity rises means that its relative pricefalls and the relative price of non-market services rises.
Each sector has the same production function:
For the market sector
𝑌𝑀 = 𝐴𝑀 𝐿𝑀

72

Productivity and how it is measured

For the non-market sector
𝑌𝑁 = 𝐴𝑁 𝐿𝑁
Firms receive price (P) for their output.

Labour markets
Each sector pays the same wage and labour is paid its marginal value:
𝑤𝑀 = 𝑤𝑁 = 𝑃𝑀 𝐴𝑀 = 𝑃𝑁 𝐴𝑁
Combining these equations we have:
𝑃𝑁 𝐴𝑀
=
𝑃𝑀 𝐴𝑁
This means that prices are completely determined by productivity and that the (relative) price of non-market
services will tend to rise as market sector productivity rises and non-market sector productivity does not.

Consumption
Depending on what assumptions we make about consumer preferences, we can get different solutions to theabove model.
Intuition: given that relative prices are entirely determined by productivity, the only question is how willconsumers and governments respond to non-market services getting more expensive? We model three
scenarios of varying realism. Note, in all three scenarios there are no pure income effects, consumers only
respond to relative price changes.

Projected growth of the non-market GVA share
A feature of this model is that the nominal share of total economic activity of the non-market sector will beidentical to its labour share35 so will be the same as shown figure A.3. However, the real share of thenon-market sector in total economy GVA tends to either stay constant or fall for all of the models (figure A.2),
which is not very different from the historical experience (real relative consumption of total non-market
services has increased only marginally). Note that because output and consumption are identical in thismodel, this is also the real ratio of consumption of non-market to total consumption in the economy.

35 This occurs because the growth in relative prices is equal to the inverse of the growth in productivity, so the necessary

terms cancel out and only the share of the labour force determines the industries share of GVA.
73

5-year Productivity Inquiry: Keys to growth Inquiry report

Figure A.2 – The non-market sector is not predicted to grow as a share of real GVA
Predicted share of the non-market sector in whole economy GVA by model
33

31
29

%

27
25
23
21
19

17
15
2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Historical

Crude extrapolation

M1: Constant consumption ratio

M2: Constant expenditure ratio

2055

2060

M3: Constant elasticity of substitution

Source: Productivity Commission modelling.

When we combine the information from figures A.3 and A.2, one picture that quickly emerges is that as
productivity grows in the market sector, Government will have to increase their share of economic activity(and hence taxation) just to maintain the same real spend on non-market services let alone increase theirreal share of expenditure.
One way of interpreting these three models is as four different decision rules for government and consumers
to manage rising costs of non-market services:
1.
2.
3.

4.

If governments and households grows their expenditure share of non-market services at historicallevels, then the crude extrapolation is the result.
If governments and households provides the same real quantity of non-market services regardless of
growing cost than the result is M1.
If governments and households decide that they are unwilling to increase the non-market share of their
total expenditure on services (and the share of taxation in the governments’ case) in order to fund thesame real level of services, then real services will decline in line with M2.
If governments and households are about as responsive to price in their purchasing as they have been
historically, then the result will be roughly what is seen with M3, a slight fall in the proportion of theeconomy devoted to nonmarket services.

Model 1: Constant real consumption ratio
Intuition: one extreme is to assume consumers never adjust their consumption based on price and always
consume a fixed ratio of market and non-market services. This represents the lower bound of consumer
responsiveness and the upper bound of the expected growth of the non-market sector.
Assuming consumers always consume the same ratio of market to non-market goods (C) regardless of price,
we can write this as:
𝐶𝑀
=𝐾
𝐶𝑁
74

Productivity and how it is measured

But all output is consumed (C=Y) so:
𝑌𝑀=𝐾𝑌𝑁
Inserting our production functions we get:
𝐿𝑀
𝐴𝑁
=𝐾×
𝐿𝑁
𝐴𝑀
So the non-market sector will expand as a share of the labour force as the market sector becomesincreasingly more productive. This situation can be thought as being similar to a Leontief production function,
consumers always want the same ratio of real market and non-market consumption and adjust consumption
one-to-one with price changes to maintain this ratio.

Model 2: Constant expenditure ratio
Intuition: the opposite extreme to the above is to assume that consumers will respond one-to-one to any priceincreases by decreasing real consumption in order to maintain the same share of their budget on non-market
goods. This could occur, if for example, governments set a maximum percentage of GDP they were willing toallocate to health or education. This represents the lower bound to the growth of the non-market sector.
Under a second set assumptions consumers allocate a constant proportion of their budget to non-market
services. Mathematically:
𝑃𝑀 𝐶𝑀
= 𝐾′
𝑃𝑁 𝐶𝑁
Rearranging and combining we get:
𝐿𝑀
= 𝐾′
𝐿𝑁
So the ratio of non-market to market labour is constant over time because consumers do not respond to
prices by changing their fixed budget allocations.

Model 3: Constant elasticity of substitution
Intuition: a more realistic assumption is to assume consumers/governments respond to the rising cost of
non-market services by cutting back, but not by very much. For example, assuming the elasticity of 0.21, forevery 100% increase (doubling) in the price of apples relative to oranges, a consumer will increase her
relative consumption of oranges by 21%.
Assuming a constant elasticity of substitution, we can model consumer preferences as:𝐶𝑀
𝑃𝑁 𝜎= 𝐾′′ × ( )𝐶𝑁𝑃𝑀
Where: 0<𝜎<1 is the constant elasticity of substitution. This parameter was set to mimic the historical data as
well as possible (this came out to about 0.21, which is relatively unresponsive to prices). K’’ is also adjusted
to match the historical data.

Results
In most cases, model 1 (M1) with constant consumption represents the upper bound of realistic projections
where consumers are assumed to be invariant to price changes (Leontief). Model 2 (M2) could be thought of75

5-year Productivity Inquiry: Keys to growth Inquiry report

the as the lower bound of realistic projections where consumers respond to all relative price changes by
cutting consumption proportionally. Model 3 (M3) is a bit of an in between that is slightly more realistic.

Projected growth of the non-market labour share
All three of these models can be used to project the share of non-market labour over the horizon of the IGR
under the assumption that market sector productivity grows at a constant rate (set at 1.66% here) and that
non-market productivity does not grow.
Figure A.3 shows that when these assumptions are made, two of the three models are broadly consistent
with both each other and the crude projection (which was based on extrapolating past trends outwards). Thatsaid, both M1 and M3 appear to give slower expansions of the non-market sector than is implied by simply
extrapolating the real world data. The likely reasons for this are that the model is a vast oversimplification ofreality and that, historically, the slow growth of non-market labour productivity has not been the sole force
driving the expansion of the non-market sector (it is likely that ageing, women entering the workforce36 orinternational demand for Australian higher education and tourism services have also been contributors).
Figure A.3 – Non-market sector employment is predicted to grow as its relative
productivity falls
Non-market sector share of the labour force (%) between 2000-01 and 2060-61
non-market % of labour hours

48
43
38
33

28
23
18
2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Historical

Crude extrapolation

M1: Constant consumption ratio

M2: Constant expenditure ratio

2055

2060

M3: Constant elasticity of substitution

Source: Productivity Commission modelling.

Projected whole economy productivity growth
The shares of the labour force projected by the various models imply different aggregate rates of labour
productivity growth across the whole economy (figure A.4). Generally, the faster the non-market sector ispredicted to grow, the slower aggregate labour productivity growth will be.

36 Women entering the workforce (or intensifying their participation) reduces the supply of home production and creates

demand for replacement market services.

76

Productivity and how it is measured

Figure A.4 – Aggregate productivity will fall as the non-market sector expands
Projected whole economy labour productivity growth between 2020-21 and 2060-61
1.25

1.2

1.15
%

1.1

1.05

1
2021

2026

2031

2036

2041

2046

2051

M1: Constant consumption ratio

M2: Constant expenditure ratio

M3: Constant elasticity of substitution

Treasury assumption

2056

2061

Source: Productivity Commission modelling.

77Abbreviations

Abbreviations
ABS

Australian Bureau of Statistics

AI

Artificial Intelligence

AIFS

Australian Institute of Family Studies

AIHW

Australian Institute of Health and Welfare

CEDA

Committee for Economic Development of Australia

CFC

Chlorofluorocarbons

CPI

Consumer price index

DESE

Department of Education, Skills and Employment

DISER

Department of Industry, Science, Energy and Resources

DVD

Digital Optical Disk

GDP

Gross Domestic Product

GNI

Gross National Income

GP

General Practitioner

GPT

General Purpose Technology

GVA

Gross Value Added

ICT

Information and Communication Technology

KLEMS

K-capital, L-labor, E-energy, M-materials, and S-purchased services productivity.

MFP

Multifactor productivity

OECD

Organisation for Economic Co-operation and Development

PC

Productivity Commission

PPP

Purchasing Power Parity

R&D

Research and Development

RBA

Reserve Bank of Australia

STEM

Science, Technology, Engineering and Mathematics

UK

United Kingdom

UNICEF

United Nations Children's Fund

USD

United States Dollar

79

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Report no. 100 – 7 February 2023

5-year Productivity Inquiry:
A competitive, dynamic andsustainable future
Inquiry report – volume 3i5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

The Productivity Commission acknowledges the Traditional Owners ofCountry throughout Australia and their continuing connection to land,
waters and community. We pay our respects to their Cultures, Country
and Elders past and present.

The Productivity Commission
The Productivity Commission is the Australian Government’s independent research
and advisory body on a range of economic, social and environmental issues affecting
the welfare of Australians. Its role, expressed most simply, is to help governments
make better policies, in the long term interest of the Australian community.
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Contents

Contents
Prefaceiv

1.

Competitive and dynamic markets

1

1.1

Competition, dynamism and productivity2

1.2

The state of competition3

1.3

The regulation of competition

13

1.4

Competition, dynamism and the expansive footprint of government

25

2.

3.

A better environment for productive investment

39

2.1

The investment challenge

40

2.2

Taxation, investment and productivity

49

2.3

Improving the business environment for private investment

51

2.4

Ensuring efficient public investment

54

Openness to trade and foreign investment

65

3.1

Introduction

66

3.2

Building trade resilience

68

3.3

Addressing barriers to trade in goods

77

3.4

Avoiding undue constraints to foreign direct investment

85

3.5

Facilitating trade in services

92

Abbreviations

97

References

99

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iii

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Preface
Productivity is driven in large part by everyday decisions made by people in businesses: about what to produce
and how to produce it; about adopting new ideas, technologies and processes; and about developing new andbetter-quality goods and services. These decisions are shaped by the commercial realities and incentives thatbusinesses face, including the state of competition in product and service markets. Dynamic and competitivemarkets allow productive firms to flourish and for resources to shift to higher-value uses.
Well-established policy and regulatory principles can help to create a business environment more amenable
to productivity growth. In part, this involves promoting contestability of markets and openness to global
competition and investment. It involves ensuring that prices are able to reflect market forces and account forsocial costs; and that risks are managed efficiently by those best placed to do so.
However, achieving this in the current economic climate will present a unique set of challenges for government.
Both the aftermath of the global pandemic and the ongoing uncertainty and volatility of global trade
have highlighted the importance of economic resilience. While supply-chain issues need to be dealt with,businesses generally have the incentives and capacity to do so efficiently. The need for resilience must notveil revitalised protectionism or selective industry policy, given the inefficiency and rent-seeking they bring.
For a small, advanced, open economy like Australia, trade and foreign investment remain vital channels forcompetition and the diffusion of innovation.
At the same time there is some concern about the state of competition as indicated by aggregate
metrics. However, aggregate trends in competition and business dynamism belie the complexity of
influences, and blunt regulatory responses risk unintended effects. A well-functioning competition regime isvital, but governments can do more to promote contestability and competition than simply guarding against
anti-competitive conduct (which often is not at issue). Other key policy levers include broad economic
settings (not least our openness to foreign direct investment and trade); industry-specific interventions(particularly in services where governments already have a significant role in the market); and the broader
regulatory framework facing businesses.
In addition, non-mining investment has been stagnant by historical standards. Efficient investment andproductivity go hand in hand — and low investment can be a symptom, as much as it is a cause, of low
productivity growth. Low investment likely reflects both structural and cyclical factors — global uncertainty,
high risk premia and compositional shifts in the economy. To this end, policy should neither attempt topromote investment for its own sake, nor to ‘reverse’ long-term structural shifts, such as the growth of theservices economy or the increasing role of online retail over brick and mortar businesses. And while a holistic
review of the tax and transfer system to enhance productivity would be valuable, narrow tax incentives tobring forward investments are unlikely to boost long term productivity growth. But governments do have a
critical role to play in the efficient provision — and pricing — of public infrastructure, and minimising thedistortionary effects of public expenditure and regulatory impediments to private investments.

iv

Competitive and dynamic markets

1.

Competitive and dynamic
markets

Key points
Competitive and dynamic markets drive productivity growth by encouraging and rewarding businesses
that develop new and better-quality goods and services and adopt more efficient production methods.
• Relatively slow investment growth, dampened business dynamism and poor incentives for innovation in the
rapidly growing government-dominated services industries are acting as a collective handbrake onAustralia’s productivity growth.
Competition and business dynamism, when measured at an aggregate level, appears to have declined.
But economy-wide metrics give limited insight into the drivers of competition in individual markets, andwhat action — if any — may be warranted. Examination of particular sectors could help identify where
consumers face limited product choice, where contestability is lacking, and where policy changes could
improve market outcomes.
• Promoting competition and dynamism will require a suite of policy levers and often a sectoral focus — particularly
where contestability is lacking and where government regulation and funding have significant influence.
• The competitive landscape could be reshaped over time were emerging trends to continue, particularly withregard to the use of e-commerce and tele-services, international trade in services, and the proliferation of
new technology-enabled business models.
Competition laws must remain fit for purpose in the context of contemporary challenges. Principles ofgood regulatory design can help ensure any reforms will promote and not hinder productivity.
• There are risks in designing specific competition rules for particular industries (such as digital platforms).
• New questions have arisen regarding the nexus between competition law and workplace relations regulation,
due to both the emergence of the gig economy and new multi-enterprise bargaining agreements.
Governments should focus on sectors where regulations unnecessarily impede new entrants and where
various forms of government involvement (such as public funding, provision, and regulation) can inhibit
contestable and competitive markets, increasing costs while diminishing outcomes for consumers.
• Prime examples include scope for competition-promoting reforms with regard to planning and zoning, andthe regulatory arrangements for private health insurance and pharmacies.
• More broadly, reform of Australia’s risk protection and social insurance arrangements could improve productivity
and consumer outcomes. Further review should focus on encouraging individual entrepreneurship, removing
barriers to innovative service models, and fostering efficient early intervention and mitigation.

1

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

This chapter will discuss the importance of competition and dynamism for driving productive outcomes in theAustralian economy including:• the links between competition and productivity (section 1.1)
• the current state of competition in the Australian economy and potential future trends likely to impact
competition in the Australian economy (section 1.2)
• the regulation of competition by governments (section 1.3)
• opportunities to harness competition to make government-run services more productive (section 1.4).

1.1

Competition, dynamism and productivity

Well-functioning markets that are competitive and dynamic are a crucial mechanism for promoting productivity
growth. Competitive pressures, combined with the commercial imperative to be profitable, lead businesses to:• innovate and experiment with new ways of doing things that improve their operating efficiency• invest in improved means of production• develop new and better-quality goods and services.
As more productive firms increase their market share by providing better, cheaper goods and services, they
crowd out less productive firms. The repetition across time of this competitive cycle drives productivity growth
in individual markets and can aggregate up to economy-wide productivity growth.
However, from the perspective of the policymaker, defining the exact characteristics of a market that make it‘productive’ is not simple, and they tend to vary from market to market.
For example, healthy competition does not necessarily require a large number of competitors. In markets
where there are economies of scale and where firms need to generate profits to internally fund investments,
a market with a small number of competitive firms may be more efficient than a market with many small
firms. Competition can also push businesses to reach a scale that minimises costs. This may involve only
one or a few businesses operating successfully, particularly where there are ‘natural monopoly’characteristics or ‘star firms’ (Andrews and Hansell 2019). There is little concern for productivity ifcompetition, even in a market with a few competitors, is vigorous. But high rates of market concentration(where the share of turnover in a market attributable to one or a few firms is high) raises the risk thatcompetition will be muted — undermining incentives for innovation, and leading to higher prices1 — a riskthat motivates Australia’s competition regulations.
Australian markets may be more concentrated than those in larger economies, or may have smaller firms in
the competitive fringe than in larger markets. Some argue that small businesses may lack the managerial
resources and incentives to innovate — this may particularly be the situation for businesses that are ‘fallingbehind’ their rivals (Aghion, Akcigit and Howitt 2013). In such circumstances, it may be business failure or
new entry that releases the ‘gale of creative destruction’ to improve productivity in the relevant market. Such
disruption also imposes costs on business owners and employees, such as bankruptcy and temporary or
long-term unemployment, and these costs may differ between industries (Cairó 2013).
Even in markets where there are few observed domestic players at a given point in time, contestability of thatmarket — including possible entry from potential domestic competitors or the threat of competition from
1 As noted by Schumpeter (1911), businesses have an incentive to minimise competition by maximising market shareand exploitation. In practice, this can lead to muted price competition. For instance, interest rates on credit cards inAustralia did not decrease between 2011 and 2021 despite the cash rate being lowered from 4.75% to 0.10%. That thefour largest banks hold 92% of all credit card loans has been cited as an explanation (Jericho 2022).
2

Competitive and dynamic markets

overseas imports — can weaken any link between market concentration on the one hand, and productivity,
costs and consumer welfare on the other.

Governments can shape markets in many ways
There is no ‘one size fits all’ model for regulating market competition to maximise long-term welfare gains for
consumers. Typically, the strength of the competitive process (rather than the number or size of businesses
in a market per se) drives a wide range of market environments that underpin productivity growth.
Governments have a role in building the foundations for competition and business dynamism to boost
productivity. Regulatory settings that favour contestable markets (ones where there are low barriers to entry
and exit) and dynamic markets (ones where market participants regularly enter and exit) can facilitate
productivity growth because competitive tensions created in such markets promote innovation and theallocation of resources to their most productive use over time.
On the other hand, narrow targeting of competition proxies can lead to poor outcomes. For instance, markets
for some online services or technological hardware are often provided by large, integrated companies at thefrontier of technology, in heavily concentrated markets. On one hand, the presence of (positive) network
externalities and economies of scale can mean that larger firms deliver better products at a lower cost. On theother hand, the absence of genuine contestability can risk poorer outcomes to the end user (through higher
mark-ups and poorer incentives to improve quality). In setting policy, governments should always consider theextent to which consumers benefit from competition, and how this weighs against countervailing effects.
While Australia has in place a sophisticated system of competition regulation to promote competitivenessand contestability of markets, the influence of many other policy settings (including the broader regulatoryenvironment) can be just as significant.

1.2

The state of competition

Many sectors of the Australian economy are relatively concentrated. The banking, supermarkets, mobile
telecommunications, internet service provider, fuel wholesale and retail, and general insurance sectors all
have four-firm market shares of 70% or more. While the average level of concentration in these sectors has
not changed much since the early 2000s (Minifie, Chisholm and Percival 2017, pp. 14, 27), recent studies
indicate that across a number of aggregate measures, proxies for competition and business dynamism havedeclined in Australia in the past two decades.

Recent trends in competition and dynamism
Overall concentration in the Australian economy increased between 2002 and 2016 (figure 1.1). The
rise in concentration has occurred alongside a decline in entrepreneurship, but there is no evidence that thisrelationship is causal (Bakhtiari 2020). Market concentration and productivity are negatively correlated,
except in export-intensive industries, where the relationship is reversed (likely due to intense competition ininternational markets) (Bakhtiari 2019).
Industry-specific data shows that market concentration trends have varied by industry, with stark increases inconcentration in some industries (such as Warehousing and storage services) while many others becameless concentrated (such as Basic non-ferrous metal manufacturing) or remained at similar levels ofconcentration (such as Coal mining) (figure 1.2). Relatively few industries experienced a sustained,
significant increase in concentration over this time period. This variation suggests that factors influencing
market concentration have not been consistent across the economy. Moreover, even at the industry-level,35-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportmarket concentration is only a partial indicator of competition — it may be the case that a small number offirms competes vigorously and/or that more efficient firms have gained market share over time. Indeed,measures of market concentration at the national level are not useful where there are monopolies in different
regions (such as the case with some regulated natural monopolies like energy transmission).
Figure 1.1 – Industry concentration has increased since the early 2000s
HHI and market power indicesa
1.5
1
HHI

0.5

0
Market Power Index

-0.5
-1
-1.5

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

a. The Herfindahl-Hirschman Index (HHI) is a measurement of the concentration of economic activity. The market powerindex is the principal component of the HHI and the log of firm population.
Source: Adapted from Bakhtiari (2020).

Figure 1.2 – Market concentration in different sectors
HHI by ANZSIC 3-digit
0.8
0.7

Warehousing and storage services

0.6

HHI

0.5

0.4

Basic non-ferrous metal manufacturing

0.3
0.2
Coal mining
0.1
0

Source: Productivity Commission estimates based on BLADE.

4

Competitive and dynamic markets

Rates of firm entry and exit declined between 2005-06 and 2012-13 (figure 1.3). While Bakhtiari (2020)highlights that business churn had been declining in Australia between 2003 and 2015, the rate of firm entry
had increased in the years prior to the pandemic, but exits continued to decline. Both entry and exit rates fell
at the onset of the pandemic, but increased in 2021. The vast majority of Australian businesses are
non-employing — comprising sole traders and independent contractors. Trends in dynamism differ
somewhat between employing and non-employing businesses (figure 1.3 panels b and c), potentiallyinfluenced by developments such as COVID-related assistance and growth in the gig economy. 2
Figure 1.3 – Firm entries and exits in Australiaa
a. Firm entry and exit rates, all businesses
25%
20%
Entry rate
15%
Exit rate

10%
5%
0%

b. Firm entry and exit rates, employing businesses

30%

14%
12%

c. Firm entry and exit rates, non-employing businesses

Entry rate

10%

25%
20%

Entry rate

8%
6%
4%

Exit rate

15%
10%

2%

5%

0%

0%

Exit rate

a. Entry and exit rates are expressed as a percentage of the number of businesses operating at the beginning of the period.
Source: ABS (Counts of Businesses, Including Entries and Exits, various issues, cat. No. 8165.0).

2 For example, a substantial amount of COVID-19 related assistance provided in the second half of 2019-20 and during

2020-21, focusing largely on employing businesses. In addition, the gig economy has come to prominence during thepast decade, likely affecting the counts of business entries.
55-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

The overall increase in firm entries in the past decade is concentrated among sole traders and independent
contractors. This may reflect that both rideshare and food delivery have facilitated the entrance of a significant
number of independent contractors in urban transport (figure 1.4). However, given that many of thesecontractors work for the same few platforms (and may not effectively compete with each other) the absolute
number of contractors is likely to overstate their contribution to competition and business dynamism.
The decline in firm exit rates, in particular, of both employing and non-employing businesses, could beindicative of reduced competition and limited pressure for resources used in less productive businesses toshift to more productive businesses.
Figure 1.4 – Business entry numbers may reflect the switch between employment andindependent contractinga
Percentage change in the number of non-employing businesses
50
Taxi and other road transport
40
30
20
%
10

All other non-employing businesses

0
-10
-20
2007-08

2009-10

2011-122013-142015-162017-18

2019-202021-22a Most transport platform-based workers are engaged on an independent contractor basis and as such require an

Australian Business Number. As such, the significant increase in the share of employing businesses that have enteredinto the transport industry since 2014 is likely to be a reflection in the growth of platform-based work.
Source: ABS (Counts of Australian Businesses, Including Entries and Exits, various issues, Cat. no. 8165.0.

Mark-ups are likely to have increased. Firm mark-ups on their input costs — possible when competitive
pressures are weak — are estimated to have increased steadily between 2004 and 2017 (Hambur 2021).3
The observed mark-ups could be the result of declining competition, but could also be due to changes totechnology that increase economies of scale; shifts towards products and services that involve more fixed
costs; or increasing competition encouraging businesses to provide better products that earn higher margins(Wainscoat and Twort 2022). (Others have noted estimated trends in mark-ups should be treated with

3 The best prevailing estimates of mark-ups are based on proxies without the benefit of firm-level price data, although

Hambur (2021) notes that this is more likely to affect levels rather than the estimated changes over time.
6Competitive and dynamic markets

caution when firm-level prices are not observed, and that making inferences from common methods ofapproximation can be problematic.)4
Overall, these trends in aggregate concentration, mark-ups, and dynamism appear to align in suggesting thatmarkets may have become less competitive. However, interpreting these results requires deeper analysis.
For example, economic activity might have skewed towards markets that are traditionally less competitive,
such as some non-traded services; alternatively, market shares might have skewed further towards larger
players within markets.
More importantly, it remains the case that aggregate trends do not necessarily translate to the consumer
experience of competition. Even when broken down by industry, the nation-wide level of concentration may
say little about the degree of competition experienced by consumers in a given area. Rossi-Hansberg, Sarteand Trachter (2020) studied the United States and found that in most industries, the growth of larger firms at
a national level helped to reduce concentration and increase product market competition at a local level, by
the larger firms entering uncompetitive local markets. Whether this holds for Australia is unknown as mostlarge national businesses already have a presence in local markets. But the caveat stands that it is difficult toinfer how the degree of consumer choice may have changed in particular localities or for particular products
and services notwithstanding an apparent decline in industry-level competition.
As discussed above, competition not only depends on existing firms in a market. It also depends on thepotential for entry of new businesses into a market when profits are high or consumer choice is low.
However, the contestability of a market is not immediately observable in market concentration and dynamism
statistics.5 Even markets with a small number of firms may be highly competitive if there is the credible threatof entry (Baumol 1982). In principle, it is the threat of entry rather than actual entry that drives contestability.
It depends on low barriers to both entry and exit by business. That said, if there is little history of actual entry
in a market, despite high concentration and high profits, the market is probably not contestable, even ifbarriers to entry and exit cannot easily be identified.

Trends that could reshape the competitive landscape
While no one can accurately forecast how the economic landscape will change over the coming decades,
some emerging trends could potentially have a significant bearing on the extent of competition in Australianmarkets for both consumers and producers.

Further growth in e-commerce and tele-services would improve contestability
The increasing use of e-commerce, as opposed to local brick and mortar stores, can improve contestability
by reducing the importance of geographic location. This has the effect of increasing effective competition
from the consumer’s perspective. Australian businesses have increasingly adopted digital technology, andbarriers to offering e-commerce are relatively low (discussed in volume 4). Barriers to consumers are also
low, given practically all Australians are within the coverage of some form of digital and physical network for

4 Bond et al(2021) cautioned against making any inferences from firm-level markup estimates when firm-level prices are
not observed. They note that ‘the implications of this so-called omitted price bias for identifying markups are much more
severe than just generating downward bias in the ratio estimator. Under the standard assumption that the flexible input andthe output price are determined from a static profit maximization problem, the ratio estimator that uses the revenue elasticity
in place of the output elasticity is identically equal to one, and therefore contains no useful information about markups’.
5 Baumol defined a contestable market as one where entry is free and exit is costless (Baumol 1982, p. 3), although amore practical interpretation would be that barriers to entry and exit may are relatively low.
7

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

both internet access (of services) and parcel delivery (for physical products), albeit the quality and cost ofaccessing those networks can differ markedly.
Australian consumers have generally embraced e-commerce. For instance, online retail trade has grown
substantially as a percentage of retail turnover in the past decade, most markedly during the pandemic(figure 1.5). It has remained well above pre-pandemic levels, particularly for non-food products. Some survey
evidence suggests that Australian habits with regard to online shopping remain behind comparable countries
such as the United Kingdom and United States.6 To the extent that more consumption can be done, and isdone online, physical barriers to competition become somewhat irrelevant, and hence will diminish.
These effects are magnified to the extent that services are consumed online, given that services delivered
face-to-face would be subject to significant physical barriers to competition. Australian consumption ofservices online increased significantly during the pandemic, although it is unclear to what extent this will
persist.7 Moreover, given that similar changes in service consumption and delivery occurred around theworld, there could be scope for a much greater trade in services online.
Figure 1.5– Online retail has remained above pre-pandemic levels
Online retail as a share of retail turnover, July 2013 to October 2022
30

Retail turnover (%)

25
Non-food
retail20
15

Total retail

10
5
Food retail0Jul-2013

Jul-2014

Jul-2015

Jul-2016

Jul-2017

Jul-2018

Jul-2019

Jul-2020

Jul-2021

Jul-2022

Source: ABS (Retail Trade, Australia, October 2022, Cat. no. 8501.0, table 23).

More competition in services will come from overseas
In the 2010s a number of global trends and developments led to strong growth in Australia’s services
exports, particularly in education and tourism, which came to an abrupt halt due to border closures related to
the COVID-19 pandemic. However, as the world reopens Australia’s services sector — which accounts for alarge (and still increasing) proportion of Australia’s domestic production — which has typically not been
subject to direct import competition, may face new competitive challenges.

6 25% of Australians shop online on a weekly basis compared with the 38% in the United States and 34% in the United

Kingdom (Australia Post 2022).
7 In June 2022, 45% of adult internet users worked from home, while 28% studied from home, 52% used online
telehealth (an increase compared with the previous two years), and 16% used professional (e.g. legal/financial)consultations (ACMA 2022).
8

Competitive and dynamic markets

Several global trends suggest that global trade in services will continue to expand, with implications for both
Australian service exports and imports. The long-term increase in incomes in developing nations haveincreased accessibility of international travel and demand for sophisticated services. More recently, thespread of faster internet connectivity has allowed services to be delivered remotely that would not have beenpossible a decade ago. The COVID-19 pandemic supercharged the utilisation of remote working technology
and normalisation of cross-border supply of a greater number of services.
At the same time, the response to COVID-19 had a strongly negative effect on Australia’s two main service
exports — education (primarily to on-shore international students) and tourism. And while international
borders have reopened, travel patterns for study and tourism have not returned to pre-COVID levels. As aresult, Australia’s service exports have recovered less strongly than its trade in goods — and less strongly
overall than other advanced countries (figure 1.6).
This suggests that opportunities for Australia’s trade in services are likely to grow post-COVID — to theextent that Australian consumers are willing to purchase service imports (and not constrained by various
regulatory factors discussed in chapter 3), there could be a significant increase in import competition. For
Australia’s major service exports, harnessing these opportunities may require some adaptation. This has
already been the experience of Australia’s education exports, which underwent a pivot towards ‘cross border
supply’ (i.e. remote learning) to supplement its reliance on consumption abroad (i.e. migration of international
students). The onus rests largely on businesses to adapt to these new circumstances, including by investingin new technological solutions — potential roles for government in facilitating trade in services are discussed
further in chapter 3.
Figure 1.6 – Trade in services as a proportion of GDP

18

16

16

Proportion of GDP (%)

18

14
12
10
8
6
4

14
12
10
8

6
4
2

0

0

1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
2019

2

1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
2019

Proportion of GDP (%)

Trade in services by national grouping; trade in services by national income

Australia

High

OECD

World

Upper middle

Low

Source: World Bank (2022b).

95-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Novel business models could improve competition in services
Different kinds of digital platforms 8 have proliferated in the past decade, each with unique implications forcompetition. Platforms that match competing businesses with customers have facilitated the entry of
independent contractors and microbusinesses in such industries as care services (e.g. Mable) odd jobs (e.g.
Airtasker) or freelance professional services (e.g. Fiverr, Upwork). These platforms can serve as incubatorsfor novel service offerings, and help to lower the costs of entry for small businesses.
Other platforms have improved competition in services by acting as service providers (rather thanintermediary services for competing businesses). These platforms provide services under their own brandname with a workforce typically comprised of independent contractors. These businesses have establishedthemselves as competitors to longstanding incumbent service providers, most notably in transport services
where rideshare services compete with taxis.
A key question for governments relates to how new business models are regulated. It will be important tofind a balance between facilitating experimentation and the introduction of new business models, while also
moving quickly enough to address unacceptable harms to consumers.
• Innovations with lower risks of harm are likely to benefit from regulatory ‘sandboxes’. Such approaches are
increasingly commonplace in Australia and internationally as a means of facilitating the entrance of new
products or services (PC 2017c). The Enhanced Regulatory Sandbox (ERS), for instance, was introduced in
September 2020 to facilitate the testing of innovative financial services or credit activities (ASIC 2020).
• Technologies with greater risks of harm and those that entail significant complexity are likely to benefit
from advance preparation of regulatory frameworks. This has been the case with regard to the National
Transport Commission’s development of a regulatory framework for autonomous vehicles (NTC 2016),
and could be of broader use for ‘deploying data-driven products and services at scale’ (Consumer Policy
Research Centre, sub. 19, p. 5).
Ultimately, regulation should aim to achieve neutrality across business models that can meet sociallyaccepted standards (in terms of delivering social benefits or limiting social harms) allowing different means ofproviding services to end consumers. Ensuring that new and incumbent businesses are expected to deliver
the same social outcomes will not always require the enforcement of identical regulations — indeed, novel
regulatory approaches will need to be developed. These issues are exemplified with regard toplatform-based work (also known as ‘gig work’) and its implications for workplace relations (volume 7).
Promoting neutrality between business models will be particularly important for Australia’s decarbonisation
efforts and the policy objective of reaching net zero emissions by 2050 (discussed in volume 6). The overalltask of emissions reduction will entail the use of several relatively novel business models, predicated on
different technologies (for instance, in carbon capture and storage, energy generation, and energy storage).
As technology continues to develop, this will give rise to new and better approaches to mitigation.
Encouraging abatement at least cost generally will require a mechanism such that different technologies cancompete on effectiveness and efficiency.
The absence of an economy-wide price on carbon emissions brings greater risk that public and private
investment fails to adopt the most efficient and effective technologies. Moreover, while governments have a

8 The term ‘digital platforms’ is used to describe a number of different services, including digital marketplaces in whichusers sell or rent goods to consumers (e.g. AirBnB, Facebook Marketplace and Gumtree); platforms for internet-based
services, such as search engines, social media services, or digital content aggregation services; or platforms thatfacilitates matching between service providers (or workers) and service users (or tasks). Chapter 5 in Volume 7 of thisreport focuses more specifically on digital platforms that facilitate platform work.
10Competitive and dynamic marketsrole in driving the development of abatement technologies, preferencing the use of particular technologies
over others risks reducing contestability and efficient abatement. A technology-neutral approach would avoid
the introduction of new barriers to contestability as climate change policy develops.

Market entry could be subdued if business investment remains stagnant
Non-mining business investment in Australia has stagnated over recent decades, with a number of otheradvanced economies experiencing similar trends. Although measured investment levels may underestimate
investment in intangibles, which is increasingly important to service industries,9 this alone does not appear to
explain the decline. A number of cyclical and structural factors play a role (chapter 2).
To the extent that investment remains stagnant, this would not only affect innovation and expansion inexisting businesses, but also the number of new businesses entering the market. In this context, it would be
important to establish to what extent trends in business entries are the result of regulatory and other barriers
to entry in specific markets, or whether they reflect broader trends in investment.
Moreover, it is difficult to anticipate the sources of competition in different industries, and thereby what typeof investment will be relevant. In some cases, new market entrants will arrive from overseas (via foreign
direct investment) or will entail expansions of large existing businesses in other sectors (involving investment
in horizontal integration). In other cases, competition might take the form of a large number of small new
entrants, or a disruptive business model (both of which might be associated more with venture capital).

Implications for policy
It is not clear from the existing research what is driving the aggregate trends in competition and dynamism,
nor what action governments should take (if any). For instance, the aggregate trends in competition, suchas increasing overall concentration, are not in themselves evidence of poor outcomes f or consumers (orthat anti-competitive conduct has gone unchecked). 10 And while there are examples where markets havelacked contestability, it is not clear that there is a crisis regarding the degree of competition across theAustralian economy.
Regardless, it remains the case that competition and dynamism will remain driving forces for productivity
growth over time, and undue barriers to competition could prevent markets from achieving gains in efficiency
and productivity. While in some specific markets, larger or more integrated firms are associated with greater
investment or innovation, this does not obviate the role for policy to encourage healthy levels of competition— such as by lowering artificial barriers to market entry, avoiding poor regulatory incentives, and guarding
against anti-competitive conduct. It will be important for governments to prioritise the right policy levers toachieve ‘bang for buck’ in influencing competition and business dynamism in Australian markets (figure 1.7).
• First, as a small open economy, a significant amount of competitive pressure in Australian markets comesfrom overseas. Contestability from foreign market entrants (either through imports or from having
established foreign businesses commencing operations in Australia) is a particularly important avenue fordriving competition. Trade in services is also likely to be a key area of new competition for Australianfirms. As such, Australia’s relative openness to trade and foreign investment will be a key element indriving competitive outcomes (chapter 3).

9 Volume 5 of this report details capital spending in physical and intangible assets over the past 60 years.
10 Indeed, in some markets, such as online search services, it is likely that concentration has risen because a small

number of innovative businesses have been able to serve consumers better. In those situations, concentration potentiallyreflects consumer gain, not anti-competitive conduct.
115-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report• Second, regulatory settings in Australian markets have the potential to influence firm behaviour to bothpromote competition and limit anti-competitive conduct. Policymakers should regularly review competition
laws and regulations to make sure that they are fit for purpose (section 1.3). Any changes to competition
laws and regulations should be guided by specific evidence of what is causing poor outcomes, what might
be failing within the current framework, and whether existing regulations are sufficiently flexible to deal
with emerging competition concerns. In addition, recent policy developments have raised questions about
the nexus between workplace relations regulation and competition policy (section 1.3).
• Third, trends in competition and their effects on both productivity and consumer welfare will vary between
industries and, as such, will require a policymakers to take a micro lens. Governments should focus on
sectors where existing regulations unnecessarily impede new entrants and where various forms ofgovernment involvement (in the forms of public funding, provision, and regulation) can create lesscontestable and less competitive markets (section 1.4). Overall, governments should focus on sectors withsignificant and longstanding contestability issues — where evidence suggests consumers areexperiencing poor choice, where firms face poor incentives to improve efficiency, or where there are
known barriers to contestability. Governments should also be wary of creating new barriers tocontestability in developing climate change policy, where technology-neutral approaches and broadly
consistent pricing of mitigation can promote competition (volume 6).
• Finally, while it is important to better understand historical drivers of market dynamics, policy reform mustbe forward-looking. Emerging trends suggest that a number of policy levers will have a bearing oncompetition, many of which are discussed in other parts of the Productivity Inquiry, given their importanceto productivity in their own right. A policy approach to improving competition would be incomplete without
addressing the issues about the access and use of digital technology (discussed in volume 4) incentives
to investment and market entry (discussed in chapter 2 of this volume and in volume 5) or the challengesof regulating platform work business models in the context of workplace relations (discussed in volume 7).

12Competitive and dynamic markets

Figure 1.7 – A range of policy levers can improve competition

Staying open to international competition

International
contestability•

Australia should pursue economic resilience by harnessing open trade.
(recommendation 3.7)•

Import competition promotes efficiency and potentially diffusion – remove tariffs and antidumping; improve recognition processes for product standards. (recommendation 3.8)•

FDI can provide new market entrants in industries with large incumbents – open FDI
settings should be maintained; the screening regime should be designed and operated withan understanding of the potential costs of chilling investment. (recommendation 3.9)•

Trade in services is likely to increase over time – Australia needs appropriate digital skills
and infrastructure, appropriate regulatory settings, and facilitatory migration settings.
(recommendation 3.10)

Improving contestability and the incentives for business investment

Regulatory
reform•Reform to Australia’s broader risk protection ‘system’ could improve incentives toentrepreneurship, innovation, and mitigation. (recommendation 3.1)•

Better planning and zoning regulation can allow new entrants to compete in industries
where physical location is important. (recommendation 3.2)•

Governments should ensure workplace relations regulation does not have unintended
consequences for competition. (finding 3.2)•

Governments can influence contestability where industry-specific regulation is complex andpervasive (such as private health insurance and pharmacies). (recommendation 3.3)•

The tax system can be the source of distortions and poor incentives. Reforms to improvethe efficiency of the tax system will be necessary in the coming decades.
(recommendation 3.4)

Addressing digital challenges and harnessing opportunities•

Through digital dynamism new entrants can more easily connect with customers online, ata national scale; horizontal platforms allow microbusinesses to test the market (e.g. Fiverr,
Airtasker, Freelancer). Digital disruption means that platforms can provide new approaches
to services and disrupt stagnant markets (e.g. rideshare, care services). Regulation should
not unduly stymie new business models. (recommendations 7.18 and 7.19)•

Mergers regulation must be fit for purpose, noting its complicated relationship with
innovation and productivity. (finding 3.1)

Digitalprogress

1.3

The regulation of competition

While competition regulation often appears to centre on specific benefits (or costs) to a particular sector,
industry, or firm, it should be noted that the ultimate objective of the Competition and Consumer Act 2010
(Cth) (CCA) is to ‘enhance the welfare of Australians’. The focus of the Act is on competition as a means toachieve enhanced economic (particularly consumer) welfare. In practice, competition is not an action that is
discretely achieved once and for all, rather it is an ongoing ‘state of play’. As explained in the ACCC’s
merger guidelines:
Competition is a state of ongoing rivalry between firms — rivalry in terms of price, service,technology and quality. Market participants are mutually constrained in their pricing, output and13

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

related commercial decisions to some extent by the activity of other market participants (orpotential market participants). (ACCC merger guidelines at 3.1)
This suggests that both the design and administration of regulations should be guided by more than simple
metrics — such as the number of competitors, market shares or the extent of concentration — which often
provide only limited insights into the actual impact of competition on consumer welfare.
Australia has a well-functioning, sophisticated system of competition regulation, but as new products arelaunched and business practices evolve, it is important to ensure competition laws remain appropriate toachieve their welfare objective. Some of the key challenges facing policymakers today include the design ofmergers control; regulating market power in data and digital sectors; the nexus between competition policy
and workplace relations (given recent reforms to the latter); and the application of regulation to new
developments in the finance sector.

Procedural improvements for merger approvals
Issues with the current system of mergers control have been raised by various parties including theregulator. While a systematic bias in the regime could be problematic for mergers control, regardless of thedirection of the bias, the ACCC has argued that the current merger control11 regime ‘is skewed towards
clearance’ of anticompetitive acquisitions (Sims 2021).
This ‘skew’ is ultimately a function of the unique system of processes for clearing mergers. At present inAustralia, a potentially anticompetitive merger can be cleared by any of three alternative procedures — an
informal12 review process by the ACCC, a formal authorisation13 from the ACCC, and clearance from theFederal Court. The three alternative procedures involve different legal standards and burdens of proof. For
example, while an action before the Federal Court is determined on the balance of probabilities, a merger
can only be formally authorised if the ACCC is ‘satisfied’ that it will not breach s.50 of the CCA. In practice,these differences could invite regulatory gaming by merger parties.
In part, this skew is attributed to aspects of the informal merger process that result in inadequate informationand time for decision-making (Sims 2021). From a detailed ex post review of recent merger cases, the ACCC
(2022c) concluded that merger parties and third parties often exaggerated certain claims (about the likelihoodof new entry, expansion, or the exercise of countervailing power) and distorted or omitted critical information.
Other criticisms relate to the interpretation of the wording of s.50 by the courts. The key issues include:• the legal interpretation of ‘likely’ in s.50 has been vexed in relation to whether it is taken to mean ‘moreprobable than not’ or a ‘real chance’• more broadly, arguments about future (hypothetical) states are challenging, in that they are predictive,
must be based on evidence, and must meet the Court’s standard of proof.

11 A merger or acquisition is illegal (i.e. anticompetitive) under section 50 of the CCA if it would have the effect, or belikely to have the effect, of substantially lessening competition in a market.
12 If the ACCC does not oppose a merger through the informal process, this protects the merger parties from legal action
by the ACCC (but not from other parties). If the ACCC opposes the merger but the parties wish to proceed, the regulator
may seek an injunction before the Federal Court then pursue a s.50 merger case (and prove on balance of probabilities)
that merger is anticompetitive.
13 Merger parties may seek statutory protection from legal action under section 50 of the Act by lodging an application formerger authorisation, with an appeal avenue to the Competition Tribunal. While the merger authorisation is in force, theauthorised parties will be able to acquire the relevant shares or assets without risk of the ACCC or third parties taking
legal action for a contravention of section 50 of the Act.
14

Competitive and dynamic markets

Different responses have been suggested as a means of addressing these issues. The ACCC has previously
recommended the introduction of a new formal authorisation regime that mandates notification to andauthorisation from the regulator; and legislative changes that would define ‘likely’ in line with its use in cartel
regulation (Sims 2021). With regard to the latter, some have argued that such legislative changes would not
resolve confusion about the counterfactual (Cao, King and Samuel 2022) and indeed similar legislation has
worked better in New Zealand in the context of clearer directions from the Court (King 2021).
Moreover, the outcomes of merger cases brought before the courts may reflect the regulator’s approach tolitigation as much as it does the law or process. The ACCC’s use of economic theory and modelling hasoften been found unconvincing in the Federal Court in the context of commercial realities and statements bybusiness representatives about their own commercial decision-making (Cao, King and Samuel 2022;
Jagot 2021; King 2021). As Jagot J (2021) noted, likelihoods are evaluated in a ‘common-sense commercial
context’. As such, it is unclear whether the need for legislative reform would remain if the regulator were toaugment its approach to litigation.
The ACCC’s proposed alternative merger clearance regime would provide more power to the regulator, andcould have a number of different implications for productivity, depending on the design. Mergers can provide
a way to efficiently remove underperforming businesses from a market. So long as the market remains
competitive, this will enhance productivity by better allocating resources. Shifting the merger regime’s focus
away from the ‘commercial context’ would risk placing more emphasis on theoretical constructs or modelling.
Removing the role for the Court altogether places a great deal of power with the regulator, necessitatingsome other avenue of accountability.
The ACCC’s most recent interim report for the Digital Platform Services inquiry did not make specificrecommendations for merger reform, but noted that:… any future economy-wide reforms to Australia’s merger laws should consider the challenges
involved in adequately addressing the competition effects of serial strategic acquisitions, including
by digital platforms. (ACCC 2022a, p. 7)
Overall, there does not appear to be a strong case for the implementation of a new formal authorisation
regime as proposed. Rather, there is likely more value in the ACCC further considering its internal merger
review processes; and for government to consider how best to avoid perverse incentives across the threealternative procedures for mergers clearance. Whichever the direction of reform, the pursuit of a morefunctional mergers control regime will need to address contemporary and emerging challenges, but should
not come at the expense of good principles of regulatory design.

The regulation of dominant firms
In Australia, the misuse of market power is governed by s. 46 of the CCA, where ‘misuse’ is defined as‘conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition’.
This definition, known as the ‘effects test’ for misuse of market power, was introduced in 2017 along withother competition policy reforms recommended by the Harper Review. It significantly strengthened theregulator to not only address conduct that was undertaken for the purpose of reducing competition, but also
conduct that had or would likely have that effect. However, these new powers have been used sparingly,
with the first test of these laws concluding in 2021 (in ACCC v Tasmanian Ports Corporation Pty Ltd [2021]).

15

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

The regulation of firms with market power has received renewed attention both in Australia andinternationally, in regard to data and advertising of search-related services and social media (box 1.1). The
ACCC noted that it has:
… growing concerns that enforcement under existing competition and consumer protection
legislation, the Competition and Consumer Act 2010 (CCA) and the Australian Consumer Law(ACL), which by its nature takes a long time and is directed towards very specific issues, isinsufficient to address the breadth of concerns arising in relation to rapidly changing digitalplatform services. (ACCC 2022b, p. 4)

Box 1.1 – Regulation of online platforms is evolving in different jurisdictions
European Union
The proposed Digital Markets Act (DMA) would designate ‘gatekeepers’ who are providers of ‘core
platform services’, which are defined as online intermediation services (e.g. online marketplaces, booking
sites.); search engines; social networking services; video-sharing platforms; number independentinterpersonal communication services (e.g. messaging and chat apps); operating systems; cloudcomputing services; and advertising services provided alongside any of the aforementioned other coreplatform services. The DMA sets out multiple obligations for ‘gatekeepers’, requiring the core services
operated by all gatekeepers to:• allow business users to offer their products elsewhere at different prices or conditions, and to choose
the promotion and distribution channels used to reach end users• not prevent end users from acquiring content, subscriptions, features or other items outside thegatekeeper’s core platform services• not require business users to use or offer the gatekeeper’s identification services as a condition of using
their core platform services, or to bundle any services with the gatekeeper’s core platform services.
United States
There are a number of bills under consideration in the US Congress that seek to address different issues
and harms arising in digital platform markets.
The proposed Platform Competition and Opportunity Act would prohibit acquisitions by a covered
platform if the business activities of the target compete with the covered platform, constitute a nascent or
potential competitor, enhance or increase the covered platform’s market position, or enhance or increase
the covered platforms’ ability to maintain its market position. The proposal also includes a reversal of theburden of proof, whereby the acquiring covered platform must prove the acquisition is not unlawful.
The proposed Ending Platform Monopolies Act would prohibit ownership or control of a business thatcreates the incentive and ability for a covered digital platform to self preference their own products andservices in a way that disadvantages competitors and undermines free and fair competition. It focuses on‘eliminating conflicts of interest’ arising from dominant online platforms concurrent ownership or control ofan online platform and certain other businesses.
United Kingdom
Under reforms proposed by the UK Government, a new Digital Markets Unit within the competition
regulator would designate firms based on an assessment of whether a firm has:

16

Competitive and dynamic markets

Box 1.1 – Regulation of online platforms is evolving in different jurisdictions• substantial, entrenched market power in a specified digital activity (e.g. search or social media), whichhas particularly widespread or significant effects, and• a strategic position in a designated activity in the market.
Firms designated with Strategic Market Status would be subject to a binding code of conduct, potential
application of pro-competitive interventions (such as mandating third-party access to data or ensuringsoftware compatibility); additional merger control requirements (including a requirement to report alltransactions and potentially a merger clearance requirement for acquisitions above a specified threshold).
The Digital Markets Unit would also be empowered to impose fines of up to a maximum 10% of a firm’s
global turnover for the most serious offences, with further daily penalties of up to 5% of daily worldwide
turnover for continued breaches.
Source: ACCC (2022b, pp. 110–116).

In its fifth interim report under the Digital Platforms Services inquiry, the ACCC made two key
recommendations about the regulation of dominant platform businesses14, which also have implications forthe regulation of dominant firms (box 1.2). Similar to reforms proposed in Europe and the United States, therecommendations entail legislating criteria for identifying particular businesses as ‘designated’ digitalplatforms, and making those platforms subject to mandatory codes of conduct containing ‘targetedcompetition obligations’.
For Australia, the concurrent development of regulatory responses in multiple regions will itself pose challenges.
While cooperation and co-learning will allow Australia to remain at the forefront of regulation, the divergence inregulatory approaches between major economies could ultimately cause complications for Australia and themarket more broadly — proposed legislation in the United States and the European Union alone show significant
differences in their treatment of acquisitions and competition (ACCC 2022b, pp. 110–116).
Regulations established in major global markets can also shape the development of the services that are
offered in Australia. For example, the introduction of the General Data Protection Regulation (GDPR) in the
EU resulted in many global digital service providers simply altering their service offerings world-wide. The
small size of the Australian market can limit our ability to implement bespoke regulations, as service
providers may simply decide that it is not worth the effort of developing a bespoke Australian product.

14 The ACCC inquiry focuses on a subset of digital platforms, which include internet search engine services, social media

services, online private messaging services, digital content aggregation platform services, media referral services andelectronic marketplace services, digital advertising services supplied by digital platform service providers, and datapractices of both digital platform service providers and data brokers. This differs to the focus of volume 7 of this report,
which addresses workplace relations issues in platform work.
17

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportBox 1.2 – ACCC recommendations for reform of digital platform regulation
In its fifth interim report under the Digital Platforms Services inquiry, the ACCC made four recommendations.
The first two relate to enhanced consumer protection measures, both economy-wide (Recommendation 1)
and specific to digital platforms (Recommendation 2). The remaining recommendations pertained to theregulation of competition:
Recommendation 3: Additional competition measures for digital platforms The ACCC
recommends the introduction of additional competition measures to protect and promotecompetition in markets for digital platform services. These should be implemented through a
new power to make mandatory codes of conduct for ‘designated’ digital platforms based onprinciples set out in legislation.
Each code would be for a single type of digital platform service (i.e. service-specific codes)
and contain targeted obligations based on the legislated principles. This would allow flexibility
to tailor the obligations to the specific competition issues relevant to that service as thesechange over time.
These codes would only apply to ‘designated’ digital platforms that meet clear criteria relevantto their incentive and ability to harm competition.
Recommendation 4: Targeted competition obligations The framework for mandatory
service-specific codes for Designated Digital Platforms (proposed under Recommendation 3)
should support targeted obligations based on legislated principles to address, as required:
•
•
•
•
•
•
•
•
•

anti-competitive self-preferencing
anti-competitive tying
exclusive pre-installation and default agreements that hinder competition
impediments to consumer switching
impediments to interoperability
data-related barriers to entry and expansion, where privacy impacts can be manageda lack of transparency
unfair dealings with business users
exclusivity and price parity clauses in contracts with business users.

The codes should be drafted so that compliance with their obligations can be assessed clearly
and objectively. Obligations should be developed in consultation with industry and otherstakeholders and targeted at the specific competition issues relevant to the type of service towhich the code will apply. The drafting of obligations should consider any justifiable reasonsfor the conduct (such as necessary and proportionate privacy or security justifications).
Source: ACCC (2022a).

Designation of dominant firms and gatekeepers
The ACCC’s proposed reforms echo several proposals internationally that use laws that identify firms basedon particular characteristics in order to apply particular regulations, prior to any proposed acquisition or otheraction. For instance laws proposed in the EU would involve designating dominant platforms as ‘gatekeepers’

18Competitive and dynamic markets(box 1.1). In principle, this is similar to the ‘declaration’ of access regimes in Australia. 15 If Australia were toadopt an approach similar to that proposed in the EU, attention would be warranted on the institutional andprocedural arrangements for designation. For example, there would be a potential conflict of interest if theauthority that determined designation was also the authority that regulated the designated businesses. 16
Conceptually, designating a firm as the subject of specific regulations (ex ante of any proposed commercial
action) assumes an entrenched position of market power. With regard to digital platforms, there is goodreason to question how entrenched any position would be in the long term, given technological progress.
Historically, Facebook has not always been the most dominant social media platform (previously MySpace)
and Google has not always been the most dominant search engine (previously Yahoo!). It has been argued
that, because of network externalities, vertical and horizontal integration, and merger activity, this time isdifferent and both Meta and Alphabet have entrenched dominance. However, to avoid inappropriate andunnecessary ex ante regulation, any designation of a business should be time-limited, either through anapplication for review or a specific time limit.
A further question relates to whether the ex ante designation proposed internationally will eventually apply tofirms outside of digital platforms. If such an approach were to be adopted, either in Australia or in majorinternational markets, it would present a significant departure in the regulatory treatment of dominant firms. It
would have significant implications for innovation and competition in Australia, in part due to our reliance onlarge, established firms to enter already concentrated Australian markets.

Finding 3.1
Competition law reform

The reforms proposed both in Australia and internationally to enable the designation of dominant digitalplatform businesses raise questions about how to regulate dominant firms more broadly. If adopted, suchapproaches would present a significant departure in the regulatory treatment of dominant firms and would
have significant implications for innovation and competition in Australia.
Similarly, emerging challenges related to digital platform markets have prompted discussion of reform to
the mergers control regime. Rather than pursuing specific rules for mergers involving digital platforms, it
could be more valuable to pursue improvements to mergers procedures more generally, including within
the current framework, so as to address issues both in digital platform markets and the economy more
broadly. Such reform should not come at the expense of good principles of regulatory design.

15 Part IIIA of the Competition and Consumer Act 2010 (Cth) allows for third parties to share the use of certain

infrastructure facilities of national significance under a regulated access regime. While services can be ‘declared’ to be
subject to a regulated access regime by the National Competition Council, there are examples where infrastructure has
been ‘deemed declared’ (such as rail, gas pipelines, electricity transmission networks).
16 To avoid similar conflicts, the Australian infrastructure access regime under Part IIIA of the CCA has one regulator torecommend declaration (the National Competition Commission) while another is involved in the regulation of declaredbusinesses (the ACCC).
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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

The nexus between competition and workplace relations
In Australia, competition and workplace relations are regulated by two separate frameworks legislated via theCompetition and Consumer Act 2010 (Cth) (the CCA) and the Fair Work Act 2009 (Cth) (the FW Act)
respectively. The separation of the two frameworks is made explicit in several parts of the CCA.17 While thisseparation is largely unproblematic, there are areas of potential overlap and inconsistency.
For example, the Harper Review concluded that there was an apparent conflict between sections of the CCA
and industrial conduct permitted under the FW Act (Harper et al. 2015). They considered it desirable for the
conflict to be resolved in a manner that promoted competition, such that businesses would ‘generally be free
to supply and acquire goods and services, including contract labour’.
More recently, the emergence of the gig economy has raised new questions about independent contractors,
who are often both workers and businesses. In addition, the passing of Fair Work Legislation Amendment(Secure Jobs, Better Pay) Act 2022 (Cth) has opened up avenues for multi-enterprise bargaining, some ofwhich will have implications for anti-competitive behaviour.

Independent contractors as workers and small businesses in the gig economy
Contractual arrangements relating to independent contractors and their clients are covered by competition
law, not employment law, even where issues relating to individual contractors are similar to other workers.
As such, independent contractors are considered both as workers and as (small) businesses. With regard tocollective action, as businesses, contractors are considered competitors to one another.18 Unless acompetition exemption is obtained from the ACCC, independent contractors (including platform workers) who
join to collectively bargain with a target business (such as a platform) could violate competition laws.
Whether a collective exemption is available turns on the public interest test — that collective bargaining mustbe likely to result in a ‘net public benefit’ if there is likely to be a lessening of competition. The ACCC (2014,p. 3) has stated that:
The CCA [Competition and Consumer Act 2010 (Cth)] requires businesses to act independently of
their competitors when making decisions about pricing and other terms and conditions of trade.
By engaging in collective bargaining participants are at risk of breaching the CCA. Authorisation ofcollective bargaining is a transparent process by which the ACCC may grant protection from legal
action where it is satisfied in all the circumstances that the proposed collective bargaining
arrangement is likely to result in a public benefit that would outweigh the likely detriment to the
public arising from any lessening of competition.

17 In s. 45DD details several circumstances where boycotts would be permitted, including where their dominant purpose

relates to employment matters. In s. 51(2)(a)) notes that most of Part IV of the CCA would not apply to actions relating to
the remuneration, conditions of employment, hours of work or working conditions of employees. So-called ‘secondary
boycotts’ (which involves at least two people acting in concert to hinder or prevent third parties from acquiring goods fromor supplying goods to others) are prohibited under section 45D of the CCA, and this restriction has been applied by the
ACCC in regard to some trade union activity.
18 Although platform workers covered by Chapter 6 of the Industrial Relations Act 1996 (NSW) may also have collective
bargaining rights for the purpose of negotiating contract agreements — relating to contract conditions — under NSW
industrial law, without requiring competition exemptions. For instance, the TWU stated that Amazon Flex drivers ‘enjoy
enforceable rates of pay along with rights to dispute resolution, union representation and collective bargaining’ following
a revised NSW Industrial Relations Commission determination which expanded coverage to eligible owner-drivers ofvans with a carrying capacity between 1.5 and 3 tonnes (TWU 2022).
20

Competitive and dynamic markets

The framework was not specifically designed for some of the more common platform work situations inrideshare and food delivery, where a large number of independent contractors work for a platform on set
prices and conditions, with no formal hiring or rostering processes. A dilemma in this case is that:• Small groups of contractors would lack bargaining power. Unlike collective bargaining under the FW Act,
there is no legal requirement for a target company to engage in a collective bargaining process following an
exemption from the CCA (whereas in enterprise bargaining, there are good faith bargaining requirements).
• Large groups of contractors are less likely to receive competition exemptions. In the case of the gig
economy, a platform may not have any incentive to engage in collective bargaining with small groups of
platform workers, and there is no legal requirement for them to do so. Conversely, a large group ofcontractors may have the bargaining power needed to bring the platform into negotiations, but may face
several legal hurdles in doing so.
These issues are discussed further in chapter 5 of volume 7.

Multi-enterprise bargaining and implications for competing firms
In December 2022, the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth) (‘the2022 Amendments’) introduced a suite of changes to the workplace relations system, including significant
changes to remove restrictions on multi-enterprise bargaining. It will likely take several years before theeffect of the 2022 Amendments can be assessed, particularly given that agreements already in place would
not be able to utilise the changes until their next bargaining round. The potential costs and benefits ofmulti-enterprise bargaining for productivity are discussed in chapter 4 of volume 7.
Some aspects of multi-enterprise bargaining could highlight existing tensions between competition andworkplace relations regulation.
For instance, one of the stated intentions of the expansion of multi-enterprise bargaining was to prompt wage
growth (Burke 2022). In effect, one of the purposes of removing restrictions on multi-enterprise bargaining is
to increase wages above the level delivered by labour market competition (albeit subject to award
conditions). All else given, higher wages will tend to increase costs and consumer prices and possibly
reduce employment in affected firms. As such, while multi-enterprise agreements may weaken potential
competition based on labour costs (typically, employers can adjust those costs within the bounds of theminimum standards set out in modern awards and National Employment Standards) this is no different fromthe general tension that exists between competition and workplace relations policy.
Moreover, multi-enterprise agreements would not deter businesses from competing with each other in thelabour market for more productive workers, in so far as employers can still offer employees wages andconditions above what is set out in the agreement (FW Act ss.202-203).19 In addition, any risk of lostcompetition in the labour market would be immaterial for classes of workers whose wages are relatively low
and for whom wage growth had stagnated. As such, recent changes do not introduce concerns about wage
suppression.
In other ways, the expansion of multi-enterprise bargaining will present new risks for competition.
A multi-enterprise agreement may act as a de-facto source of collusion, depending on the details of theagreement. For example:

19 Agreements between firms to avoid competing for staff are prohibited by antitrust law in other countries like the UnitedStates, but in Australia are outside the scope of the CCA.
21

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report• if an agreement required participating employers to set the same wages and conditions, as well as thesame rates of increase, this would preclude price competition over time that might arise were any given
firm to offer smaller wage increases. The degree to which this could lessen price competition depends
partly on the importance of wages and conditions as a source of costs and on the coverage of theagreement for businesses in the relevant market• if an agreement limited the ability of employers to adopt innovative employment practices — such asalternative forms of incentives and remuneration for workers, or changing the deployment of different
groups of workers — then the agreement may limit innovation and competition (to the detriment ofconsumers). Both workers and employers have incentives to create such agreements as the gains fromreduced competition can be shared across shareholders, managers and incumbent workers.
An additional complication could arise if employers were forced to join a multi-employer agreement. If
employees within an unwilling firm apply to the Fair Work Commission (FWC) for a variation to be added
onto an existing multi-enterprise agreement, then in some limited circumstances, the firm may still be
required by the FWC to join an existing enterprise agreement held by a competing firm(s). 20 This process
could lessen competition if, for example, new entrants to a market were required to adopt wages andconditions that better suit larger incumbent firms.
Some businesses have already suggested that multi-enterprise agreements could help prevent othercompetitors from undercutting their prices, which they argue would keep out underqualified and unsafe
workers (Marin-Guzman 2022). However, this presupposes that safety regulation (including occupational
licensing) is deficient — any genuine safety issues would be better addressed within safety regulation.
The remedies for these risks rest with the FWC, and in particular, their interpretation of whether a given
multi-enterprise bargaining arrangement meets legislated guidelines, and whether they are in the public
interest. The question of public interest would be the main criterion on which decisions on competition would
be made. Given the minimal guidance in the legislation on how competition should be weighed against otheraspects of public interest, it is unclear how the FWC’s approach to competition issues would differ from, say,the competition regulator, or to what extent FWC decisions (which would form the basis of case law) would
be consistent with the intentions of the CCA.

20 The FWC can only approve a variation to add an unwilling employer and their employees to an existing single-interest

agreement or supported bargaining agreement if all the legislated conditions are met. When approving a variation to a
multi-employer agreement to add an unwilling employer and their employees, the FWC must be satisfied that; it is in the
public interest to add the employer, the employer is reasonably comparable to other employers on the existing
agreement, the employer has 20 or more employees (excluding any irregular casual employees), the employer and theiremployees are not on a current enterprise agreement, the employer is not currently bargaining for a single-enterpriseagreement in good faith, the employer has a history of bargaining effectively with their employees and the employees are
not in the general building or construction industry.
22Competitive and dynamic markets

Finding 3.2
Multi-enterprise bargaining and competition

The recent liberalisation of multi-enterprise bargaining arrangements will have complex implications forcompetition to the extent that it involves agreements between competing businesses on a significant areaof costs — wages and conditions. Some such arrangements could lessen competition or risk acts ofcollusion. The extent of these risks are lower where:••••

wages comprise a small proportion of business costs in a given industry
the firms involved collectively account for a small market sharethe employees involved collectively account for a small share of the relevant (potential) workforce
firms remain able to opt for single-enterprise bargaining, individual agreements or to use awards.

It is the responsibility of the Fair Work Commission to determine when multi-enterprise bargaining will beallowed. However, it is unclear how the Fair Work Commission will weigh competition concerns against
other aspects of the public interest.

Regulating financial services
The degree of competition in the financial services sector has been the subject of reform since thederegulation of the sector was completed in the mid-1980s. In its 2018 inquiry into Competition in theAustralian Financial System, the Commission concluded that while financial services are dominated by large
players, changes to market structure were unnecessary (and unlikely) to improve competition. Rather, policy
should focus on reforms that alter incentives of financial service providers, bolster consumer power, andimprove governance (PC 2018, p. 4).

Consumer choice in general insurance
The complexity of financial products tends to confuse, rather than empower consumers, leading them topurchase too much or too little of a financial product. This weakens the extent to which consumer choicepromotes competition because consumers find it difficult to understand and compare the many facets offinancial products, limiting their capacity and ability to shop around. In the case of general insurance, market
research (conducted in 2014) showed that:• Consumers frequently had some awareness of price differences and the potential savings thatthey could gain but their awareness did not align with the full extent of differences in the market.
• In general, ‘ … there was little to no understanding of why these price differences exist, how
insurance is priced, and what influence various characteristics of the insured policyholder andthe property have on the final premium.’• Understanding policy details and level of coverage was a key issue, with few knowing how toseparate and interpret the different ‘fine prints’ offered by each insurer. Most admitted they did notever read the [product disclosure statement] and of those who did, none were able to understandit given the complexity in wording and length of the document. (Fels and Cousins 2019, p. 12)
Complexity is an impediment to effective user choice and presents inherent challenges in improving
competition for services like general insurance. It also creates scope for marketing to masquerade ascompetition. For example, while the number of retail brands (and insurance products) has grown, there are
relatively few insurers underwriting those products.

23

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report• The Commission noted that the four largest insurers underwrote 30 brands of insurance (PC 2018).
• The ACCC found that in northern regions of Australia, eight insurers sell the vast majority of home,contents and strata insurance via approximately 150 brands and intermediaries.
The proliferation of insurance products with only slight variations has become a burden for consumers(PC 2018, p. 13) and make comparisons much more difficult (ACCC 2020, p. 117). And while some degreeof competition still exists between brands under the same insurer, it is limited, given the insurer has the
incentive to maximise profits across the portfolio of brands that it underwrites. As such, this market structure
creates the illusion of more competition.
A way to improve transparency, and hence competition, in insurance markets (with relatively little cost andminimal intervention) would be to inform consumers about when they are choosing from products offered bycompeting insurers and not just a diverse set of products from the same insurer. There could be value, inparticular, in providing more information to consumers at the point of their decision-making — both in regard
to which brands are underwritten by which insurers, and (for renewals) how their new premium compareswith their previous one.

Competition in banking and home loans
While aspects of Australia’s banking system remain highly concentrated, improvements in competition forsome personal and business banking products have occurred in recent years, including via developments in
new forms of finance. The ACCC observed that:
There are some signs of increasing competition in the banking sector, most notably in home loans
and international money transfers (IMT). There has also been new entry by a range of neobanks
and fintechs, who are playing an increasingly important role in the market, often with innovativetechnology and business models and a move to a more customer-centric platform-based models.
We have also observed innovation in the provision of payments services, through new technologies
and use of services such as the New Payments Platform. These innovations continue to enhance
productivity of the financial services delivered to Australian consumers. (ACCC, sub. 72, pp. 9–10)
In some cases, regulation has yet to catch up with developments that reduce the benefits of competition
for consumers. For example, incentive structures for brokers in the home loan market, which include trail
commissions and ‘clawback’ of commissions, create conflicting incentives (PC 2018, pp. 324–331).
Following a Royal Commission into Financial Sector Reform, a range of regulatory changes were
implemented, including a best interest obligation for mortgage brokers. However, it remains to be seen
whether this will be sufficient, given both trail commissions and clawback structures remain in place,following the abandonment of a slated ACCC review.

24Competitive and dynamic markets

1.4

Competition, dynamism and the expansive footprintof government

In a number of industries, regulatory restrictions and other government interventions are themselves the cause
for limited contestability or poor incentives for efficiency. In a number of parts of the economy, government
interventions — either deliberately or inadvertently — have the effect of lessening exposure to risk, which inturn, can lower incentives for business dynamism and productivity growth, as well as for individual risk taking
and entrepreneurship. Positioning these parts of the economy for future productivity growth might then requirechanges to the underlying incentives that businesses and individuals face to offset the lack of competitivemarket pressures that would otherwise have motivated service provision, for example, that is responsive toconsumer demand, or innovation in processes that is responsive to a threat of market share loss.

Improving risk management and insurance
Though not recognised as such, Australia has a ‘risk protection system’, consisting of voluntary private
insurance (including health insurance, life insurance and general insurance for property damage), mandatory
contributory insurance schemes (such as workers compensation and compulsory third party insurance) andthe publicly funded social safety net (unemployment benefits and pensions) and in-kind insurance (Medicare,public housing, NDIS and aged care).
There are also a range of regulatory safety nets — most notably Australia’s industrial awards system.
All are characterised by significant government involvement, via the regulation of private insurance, themandating and often public underwriting of universal contributory schemes, or the direct funding or deliveryof government programs. These elements have developed by increment and without holistic design.
The scale of these broad forms would be substantial, considering that social insurance not only combines
elements with an explicit risk-management focus like private insurance, but also those with a strong focus on
redistribution like pensions and income support.
Risk protection has benefits: people value extra income more in bad times than in good. Nonetheless, this ad
hoc ‘system’ of risk protection and insurance lacks coherence and arguably has become a potential barrier toinnovation and productivity growth on a range of fronts:• gaps in risk protection can reduce risk appetite (such as diminishing willingness to change career or starta business), which could reduce the dynamism of the economy• the transfer system can create adverse work incentives, affecting labour supply• regulatory restrictions on private insurance can prevent new approaches to prevention, and more
efficient service design, thereby limiting innovation and more productive options• publicly funded programs do not always embed strong disciplines around insurance principles likemaximising long-term outcomes and cost containment.
Unlike the retirement savings system, which has a recognised architecture, the risk protection system inAustralia is not well understood. Its complex inter-linkages have not been systematically examined.
Steady and evidence-based reform in this area could yield substantial long-term gains for innovation,
productivity growth and better outcomes for individuals and firms.
The best approach is to address known problems and inefficiencies in the near term, combined with a broad
ranging, generational review into Australia’s social insurance system to achieve better coherence and test its
robustness to new forms of risk affecting the modern economy.

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Some of the issues that a review would assess, and on which near term reforms could start to makeprogress are: the impact on entrepreneurship; barriers to innovation; and poor incentives for mitigation.

The impact on individual entrepreneurship
Australia and New Zealand are outliers in following a ‘social assistance’ approach to income replacement in
the event of job loss. This model involves access to uniform, means tested payments funded through generaltaxation. Most OECD countries operate contributory unemployment insurance schemes with eligibility andbenefits influenced by prior income and individual contributions.
One consequence is that many households in Australia and New Zealand can face larger falls in short-term
income in the event of job loss than is typical in other OECD economies.
There is no inherent superiority associated with the unemployment insurance arrangements prevalent inother developed economies. They can be costly and — because funded through contributions — involve an
increased ‘wedge’ between the wages employers face and an employee’s take-home pay. They are also, by
design, less progressive (that is, redistributive) than the Australian and New Zealand models.
It is noteworthy, however, that during the COVID-19 pandemic, policy changes included a temporary
increase in Jobseeker (the means tested income support payment) and giving households access to a
portion of their accumulated superannuation balance. These features arguably mimic aspects of acontributory scheme, albeit after the economic shock occurred.
These developments add weight to the case for holistic review. An important question is the extent to which
greater protection against income loss could better support workers affected by economic transition (e.g.
through structural change) and reduce any undue risk aversion created by existing arrangements.
A review could also consider what options Australia has to improve short-term ‘replacement rates’ via
mechanisms that go beyond self-insurance but stop short of radical change like a full-blown unemployment
insurance scheme. Any of these possibilities have to be weighed up against the capacity for governments toflexibly fund public insurance through taxes and to spread these costs over generations through debt.
Existing life insurance through superannuation provides some income protection in the event of illness andinjury. Other forms of idiosyncratic income loss (e.g. through loss of a job) are hard for private insurers tounderwrite. But there may be some scope for incremental expansion of income protection where the pool islarge (as with group insurance through superannuation) and ‘moral hazard’ and adverse selection issues canbe contained. Greater use of income contingent loans — a well-established system for recovering up front
education costs — could also be part of a broader suite of instruments to provide protection against loss of
income with some element of risk pooling.
Of course, in the face of a large-scale shock, such as a pandemic or substantial economic downturn, thegovernment will tend be the lowest cost insurer, with its ability to pool risk across the whole community andacross time.

Barriers to innovation and new service models
Private insurers are heavily restricted in the services they can offer to members, which in turn limits potential
innovation and more productive approaches.
Private health insurance is a heavily regulated product with a highly restricted domain (box 1.3). Hospital
cover pays for aspects of private hospital episodes (accommodation, theatre fees and clinician gap
payments), while ancillary cover can pay for out of hospital treatments that are not eligible for Medicare
Benefit Schedule rebates.

26

Competitive and dynamic markets

The burden of disease has shifted towards noncommunicable disease and chronic physical and mental
health conditions. Hence the health system as a whole is needing to put greater emphasis on the avoidanceof hospital admissions through prevention and supported self-management. This includes, where possible,
helping people to remain active in the community and workplaces.
In principle, private health insurers are well positioned to play an active role in facilitating innovative models
of care to improve prevention and long-term outcomes. Two barriers stand in the way.
One is the risk equalisation arrangements that underpin community rating. As noted in Shifting the Dial, ex
post risk equalisation can greatly diminish the dividend to insurers from preventing ill health among theirmembership, as a significant portion of the savings can be redistributed back to the overall equalisation pool.
This has been noted in submissions to this inquiry.
The second is the restriction on out of hospital services. While insurers are permitted to fund services thatare deemed a ‘hospital substitute’, submissions to this and past inquiries have consistently noted thechallenges in ensuring the regulatory definitions of hospital substitute treatment keep pace with emerging
trends — including the tendency for services once provided exclusively in hospitals to be delivered in arange of other settings. More generally, as one submission contended:… funding services in a community setting rather than in a hospital will reduce the incentives to
medicalise treatment. (Bupa, sub. 69, p. 8)
A broader regulatory remit, along with targeted reforms to risk equalisation, could open up new options forinnovation. For example, in the Mental Health inquiry, the PC recommended that health insurers should havethe discretion to fund out of hospital services that lower the likelihood of hospitalisation.
Options to reform risk equalisation can be targeted, as noted in Shifting the Dial, and need not amount to amove to ex ante equalisation (on the basis of objective attributes of a fund’s membership). One modest reform
would be the ability to exempt identified prevention programs and their impacts from the equalisation pool.
As the Commission found in its case study on innovation in care for chronic health conditions, one of thebarriers to experimentation and new models of care is funding models for primary care that lock in fee forservice reimbursement with a pre-determined service model (such as the one-on-one, real-time
consultation). In principle, private health insurers could be well positioned to contribute to more innovative
reimbursement models that pay on value rather than labour input.
There are also silos between health and life insurance. As with private health insurance, life insurers play akey, but restricted, role in Australia’s health care system. Life insurers, via their income protection policies,
have a strong incentive to maintain the health and wellbeing of their members, particularly with emphasis on
facilitating a return to work.
Life insurers can provide rehabilitation focused on return to work, but cannot provide benefits that mightotherwise be insured by a private health insurer (or that would be eligible for Medicare rebates).
It is an open question whether the silo between life insurance and private health insurance, created byregulation, stands in the way of more innovative and efficient options to improve outcomes at low cost. A key
concern could be that private health insurance is a community rated product, whereas life insurance is either
individually underwritten or community risk rated on the basis of the population served through groupinsurance via superannuation (which will tend to be younger on average than the private health insurancepool). But there may be scope for incremental expansion of both life and health products to fund evidence
based preventative interventions.
Life insurers could have greater scope to fund (as distinct from promote) evidence-based early intervention
and self-management options.
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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Mental illness is one area where the role of health and life insurance, as well as workers compensation,
could be expanded and/or clarified. The rising salience of mental illness has challenged the traditional rolesand definitions of aspects of our (public and private) social insurance arrangements. In particular, the cost ofmental illness in workers compensation schemes has risen, just as the risk of physical injury at work has
diminished over time.
Workers compensation schemes are no-fault (i.e. do not rely on establishing negligence on the part of
employers) but generally require that injuries or illness occurred at or due to work. This can be complex inrelation to mental illness, such that claims can be contested for lengthy periods. The PC’s Mental Healthinquiry recommended no-liability early intervention in respect of psychological services, even if a claim forincome replacement was still pending.
There is an overlap with life insurance. Past submissions to the PC have noted that life insurance pays out
benefits to members suffering mental illness and where the workplace has been a contributing factor, among
others. It is not uncommon for claims to be pursued via workers compensation first and later with life insurers
if unsuccessful.
Whether this division of labour is optimal, and sustainable, for both forms of insurance, is an open andimportant question. The funding mechanism can look similar — much life insurance funded via
superannuation (ultimately from contributions) while workers compensation is funded through levies on firm
payrolls. The important question is where risks are most efficiently borne and who can most effectively drive
which preventative actions (life insurers with their members and/or work health and safety regulators with
employers and workplaces).

Poor incentives for mitigation and early intervention
Aspects of the social insurance system take the form of government funded and delivered programs andservices. As noted above, many have an explicit focus on redistribution, but many also reflect risk
management motives.
Government programs do not always fully embed an insurance mindset — that is, a strong discipline on
reducing long-term costs through targeted early intervention and better outcomes. The PC’s work on
Veterans’ support indicated a system that was complex, unresponsive and too inflexible to achieve optimal
long-term outcomes for clients. Similar characteristics were observed in disability services prior to the NDIS.
Australia and other jurisdictions have trialled a range of options to try and embed greater focus on long-term
outcomes and costs, including New Zealand investment approach, social impact bonds in Australian states
and actuarial assessments of long-term costs associated with cohorts of income support recipients. In areas
like primary health care, as noted above, funding models are often a barrier to innovation, as they lock in aparticular configuration of service delivery.
Not every government program is necessarily amenable to an insurance approach. But many are, given thatrisk protection is often the underlying rationale for government involvement. Targeted expansion of the useof an insurance approach could unlock substantial productivity gains in traditionally ‘hard’ areas of service
delivery. This could be an important element of a far-reaching review of the overall social insurance system.
In general insurance, there have long been calls for greater investment in up front mitigation rather thandisaster relief after the event.
In its 2015 report on Natural Disaster Funding and 2009 report on Government Drought Support, the PC
recommended a shift of relative funding effort towards up front mitigation and resilience bui lding. The
Government’s recently announced Disaster Ready Fund is a good example of this renewed emphasis on
prevention.

28

Competitive and dynamic markets

Rigorous selection of projects and evaluation of the program could help identify where up front public funding canhave the greatest impact in reducing the damage caused by natural disasters. It is possible that such approaches,
including options co-funded with the general insurance industry, could help deal with other risks more efficiently.
A broad ranging review could bring into play insurance concepts that tend to be misunderstood orde-emphasised in many policy settings, like moral hazard, adverse selection, risk management and therespective roles of pooled and self-insurance options.
In the near term, some smaller steps could be taken to improve aspects of the system and unlock
productivity gains.

Recommendation 3.1
A generational review and reform process for Australia’s risk protection ‘system’

Government could commence a broad review of Australia’s risk protection and social insurance
arrangements, focusing on:• encouraging individual entrepreneurship• removing barriers to innovative service models by insurers• fostering efficient mitigation and early intervention.
In the near term, incremental gains could be made by progressing:• abolition of stamp duty on insurance premiums• continued incremental expansion of the range of out of hospital services that private insurers can fund• targeted exemptions from risk equalisation for innovative, evidence-based preventative initiatives byhealth insurers• greater flexibility for life insurers to fund (on a discretionary basis) some approved health-like services,
particularly in areas like mental health• increased sharing of government held or funded data, particularly data collected through healthproviders (recommendation 4.4)
• continued exploration of the ‘insurance approach’ in government programs through measures such as
payment by results, social impact bonds, actuarial evidence and innovation funds.

Box 1.3 – Regulatory arrangements in private health insurance
Private health insurance is subject to significant regulation and public subsidy. The extent of government
involvement in the sector reflects the role that private health insurance plays alongside Medicare in thefunding and provision of health services.
For private health insurers, prices and profitability are highly dependent on policy settings. Tax incentives
influence consumers’ choices to purchase health insurance, particularly at younger ages. Premiumincreases require ministerial approval. And premiums are subject to community rating, in contrast toother types of insurance that are ‘risk rated’ and influenced by personal circumstances, demographic
factors, or past experiences.
While a competitive market exists in name Australia’s unique regulatory framework means that some ofthe efficiency gains that might be expected in a competitive market are not realised in practice. BUPA

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportBox 1.3 – Regulatory arrangements in private health insurance
noted that despite the existence of a ‘substantial number’ of large funds in the Australian market,
competition is ‘stifled’:… by the legislative framework that requires a process of a single, annual premium increasefor health funds approved by the Minister for Health. This limits flexibility in adjusting pricethroughout the year, both in response to consumer demand and competition. Furthermore, thesingle annual increase requires funds to hold additional capital to account for changes inmarket conditions that, in other sectors, would be addressed by adjusting price. Thisadditional capital could otherwise flow through to consumers in the form of lower premiums.
(BUPA, sub. 69, p. 13)
Moreover, the personal income tax incentives for private health insurance mean that overall, consumptionof private health insurance is not linked to the quality of service provided by the industry collectively.
Indeed, some consumers may hold onto private health insurance despite reductions in value-for-money or
quality of service — effectively rewarding poor service — simply in order to retain the Lifetime Health Coverprotections. While some suppliers may provide high quality services, the incentives to improve efficiency,
which might otherwise exist in a more competitive market setting, are dampened.
Regression analysis covering the period 2010–2017 found a decline in technological change for several
Australian insurers, resulting in declining productivity growth (Nguyen 2021). Nguyen also found thatfirms varied in terms of efficiency, with a U-shaped relationship with firm size.
In terms of outcomes for consumers, value for money has been questionable. The Grattan Institute notedthat the ratio21 between claims and revenue tended to vary considerably between providers — as abenchmark, some ratios were similar to or below the minimum ratios legislated in the United States(Duckett and Moran 2021, p. 22).
While a decline in the demand for private health insurance would place more pressure on public finances, so
too would many of the solutions suggested by industry, including increased targeted subsidies and tax
exemptions (David 2019). Others have called for greater scope for insurers to provide discounts to customers,
including to encourage good health choices (BUPA, sub. 69, p. 13), which would potentially test community
rating principles. Other settings, such as the governance of prosthetics pricing, is outside the control of private
health insurers themselves, but has significant bearing on their provision (Duckett and Moran 2021, p. 18).

Reducing location-related restrictions on competition
As noted above, the growing use of e-commerce and tele-services could significantly reduce geographic
barriers to competition over time.22 However, location remains an important factor for businesses that rely ona physical presence: proximity between businesses and their consumers can influence market share, andbarriers to viable locations can be a barrier to entry in a number of sectors. Most of these restrictions arecontained in state/territory/local government planning, zoning and development assessment arrangements.
In what appears to be a minority of industries, there are also industry-specific government regulations that
restrict business location, and hence, competition.

21 This ratio averaged about 86% prior to COVID-19, rising in 2020 likely due to the effect of COVID-19.
22 ABS, Retail Trade, Australia.

30Competitive and dynamic markets

Urban planning and competition
The availability of viable locations and sites for particular types of business activities can influence market
entry in some sectors, with direct implications for business dynamism and competition at the local level.
Depending on the type of business, what is a viable site may entail consideration of the site size,
accessibility, or proximity to other businesses, consumer populations, infrastructure or logistics networks.
Scarcity of sites with particular characteristics is, to some extent, unavoidable in urban areas. In some cases,
commercial constructs can also influence the availability of such sites — commercial leases have previously
been shown to guard against the introduction of new competitors.23
More broadly, planning and zoning regulations at the state and territory level have proven to be a significant
lever for facilitating (or restricting) market entry. Such regulations usually exist to deliver agreed social
outcomes — such as public health and safety, or environmental amenity — but are often very prescriptive
rather than outcome oriented in their specification or implementation and thereby may unduly restrict the
setup of particular types of business. This can impede new entrants, or limit scope for existing businesses toexperiment with different service offerings. For instance, opening a supermarket in a vacant warehouse in a
‘B6 Enterprise Corridor’ in Sydney would involve a planning proposal to allow an additional type of use forthat zone, typically adding 12–18 months to the process (PCNSW 2020, p. 240).
Broader structural trends in some product and service markets — the rapid growth in online retail and theincreased feasibility of more people working from their homes, for example — highlight the need for someflexibility in Australia’s planning and zoning systems. In many areas, these trends are contributing to theincreasing need for delivery and warehousing in urban areas (given growth in both e-commerce and urban
density), and a shift away from manufacturing and other industrial occupations, and towards
knowledge-based occupations in urban centres.
The competition for viable sites is likely to affect competition in some burgeoning secondary markets,particularly in urban areas. For instance, the transition to low emissions vehicles has already seen significant
private investment into electric vehicle charging stations — the need for stations at various locations will
depend on factors including uptake, charging times, and proprietary technologies. Indeed, as multiple vehicle
technologies enter the market (potentially including battery-swapping and hydrogen charging) the ability toestablish convenient refuelling networks will have significant implications for competition in the vehicle
market. (Climate change transitions are discussed more fully in volume 6).

Reforming planning and zoning
While some progress has been made to improve planning and zoning across all jurisdictions, further
improvements should be prioritised.
Reforms to planning and zoning laws in Victoria in 2013 and 2018 are a useful example, in that there are relatively
few commercial and industrial zones; the zones are standardised and have a broad range of allowable uses; andmany commercial uses are as-of-right. The reforms were largely found to reduce set-up costs and increase theavailability of suitable sites for particular businesses (such as small-scale supermarkets and large format retailers)
improving competition (PC 2020d). Broadly these experiences support the idea that business zones should be as
broad as possible (as noted by Harper et al. (2015) and the Commission (2021b)).

23 Across 2009 and 2010, the ACCC reached agreements with all major supermarket chains operating in Australia thatthey would not enter into any new leasing agreements that include restrictive provisions, nor would they enforce any
restrictive provisions in current leases beyond five years after the commencement of trading. Signatories included ColesGroup Limited, Woolworths Limited, ALDI Foods Pty Ltd, Franklins Pty Ltd, SPAR Australia Limited, Australian United
Retailers Limited, and Metcash Limited.
31

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Where planning regimes are more agnostic to uses, and zoning is broader, this also avoids the need forrezoning processes. Current rezoning processes often involve consideration of the effects on incumbent
businesses, including from increased competition. To this end, Harper (2015, p. 45) recommended thatplanning decisions should not be adversely influenced by the potential for competition between individual
businesses, nor by the impact on the viability of existing businesses; and that restrictions should not apply tothe number of a particular type of retail store in a local area, nor the proximity of particular types of retailstores to each other. Similarly, the NSW Productivity Commission (2020) noted that there is a strong case toconsolidate a number of business and industrial zone categories 24 into a single zone that allows ‘a mix ofbusiness, light industrial, creative industrial, and retail activities’ (p. 241).
The Commission (2021b) has previously suggested improvements could be made by pursuing administrative
efficiency, including by aligning plans at different levels of government; and addressing simpler applications
outside of the assessment process. Key reform areas relevant to competition include:• Move to fewer zones with broadly-stated allowable and as-of-right uses. A small numberof commercial and industrial zones (2–3 respectively) — with a wide range of allowable uses —provide flexibility, certainty, and competition, and limit the need for significant spot rezonings.
Prohibited uses are kept to a minimum and most uses are as-of-right.
• Standardise permissible land uses within zone types. Zone definitions are as common andas consistent as possible across the state, and usually embedded in state government
instruments, to provide clarity and certainty as to allowable land uses.
• Create defined and efficient processes for rezoning applications. To the extent thatrezoning or planning scheme amendments are required to progress a development proposal,
states ensure there is a clear process for applicants to pursue, with expected timeframes,
criteria and appeal rights.
These reforms should be considered in the context of the overarching objective of balancing commercial,industrial and residential uses of urban land. The Commission’s (2022e) recent inquiry report on The
National Housing and Homelessness Agreement considered how planning and zoning regulations restricted
the supply of residential land and the implications for the supply of housing. Some empirical researchsuggests that zoning restrictions add significantly to the cost of both apartments and free-standing homes in
Sydney (Kendall and Tulip 2018; Jenner and Tulip 2020), although it is difficult to accurately estimate theseeffects in part because regulations change over time and vary in terms of how binding they are on planning
activity(Phibbs and Gurran 2021). On balance of the evidence, the Commission has noted that restrictiveplanning and zoning regulations can pose significant and unnecessary costs, and recommended revisingplanning and zoning to achieve greater density (box 1.4).
Further liberalisation of residential planning controls, including greater allowance for mixed land use, stands
to support productivity growth through several channels, including an increase in dwelling services for each
unit of scarce urban land, an increase in agglomeration benefits, and a reduction in transport times between
households and businesses. It may also better position Australia’s housing market to respond to increases indemand associated with Australian population growth, which stands to be an important channel for
productivity growth over the years ahead (chapter 1 of volume 7). This will likely include ensuring a diversityof housing stock, which could further support potential changes in the composition of Australia’s migration
program over time, and support increased geographical mobility of labour more generally.

24 B5 (Business Development), B6 (Enterprise Corridor), B7 (Business Park) and IN1 (General Industrial).

32

Competitive and dynamic markets

Box 1.4 – Planning and zoning in the National Housing and Homelessness Agreement
The Commission’s (2022e) recent inquiry report on The National Housing and Homelessness Agreementfound that:
There is no one-size-fits-all solution to achieving greater density, because the restrictions that
constrain supply will be different in each jurisdiction. Any changes to zoning regulation should
balance the benefits of additional supply against costs to the environment, amenity andliveability of cities. The changes should also be supported by existing or proposed
infrastructure, public transport, community facilities and access to jobs. But a good starting
point to encouraging greater density in residential zones would be to:• review zoning rules that allow only single detached houses• allow more dense development ‘as of right’ along key transport corridors, with height limits
set up front• relax regulations limiting the use of secondary dwellings• relax minimum carpark requirements for developments where there is good access topublic transport• relax minimum floor sizes. (Finding 13.2, p. 514)
The report recommended that:
States, with their local governments, and Territories should revise their planning regulations topromote greater density to meet demand for well-located housing in established suburbs andlocations with good access to jobs, services and transport.
States, Territories and local governments should also revise planning regulations to facilitate
greater housing diversity, including low-cost or innovative housing types.
(Recommendation 13.2, p. 514)

Recommendation 3.2
More flexible and streamlined planning and zoning

State and Territory Governments should revise their planning regulations to ensure residential,commercial and industrial zoning is not unduly restrictive. This should include:• implementing standardised business, and industrial zones across local government areas• aggregating existing business and industrial zones to reduce the number of zones where possible andto broaden the range of permissible activities• ensuring that urban planning decision-making processes consider the introduction of competition to
incumbent businesses as a positive outcome.

Industry-specific restrictions on location
There are relatively few instances where governments actively restrict the location of businesses in aparticular industry. Typically where this occurs, it is to minimise adverse social outcomes expected to be
associated with a particular activity, given vulnerable populations or environmental assets to be protected. In33

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

the case of gaming machines, for example, some states (such as Victoria) cap the number of machines intheir state or in regions within the state, in order to limit gambling opportunities in vulnerable communities(Victorian Government nd).
The location restrictions that governments apply to retail pharmacy, however, stand in stark contrast to this.
Rather than restricting an activity that could be expected to have an adverse social or environmental
outcome, the Government restricts the location of a business that contributes to community health andwellbeing, and thereby limits the scope for getting improved outcomes for consumers.
Retail pharmacy is subject to a specific set of regulations regarding market concentration. At theCommonwealth level, the Pharmacy Location Rules regulate where retail pharmacies can operate,ostensibly to ‘ensure a well distributed geographical spread of pharmacies across Australia’. At the state andterritory level, the ownership of pharmacies is regulated — in most jurisdictions, regulation stipulates that
only a registered pharmacist (or a family member) can own a community pharmacy, and restrictions apply tothe ownership of multiple pharmacies that are located near each other. Such rules have not been unique toAustralia, although several countries such as the United Kingdom and United States now allow pharmacies
to be co-located with supermarkets.
Both sets of regulations dampen competition in retail pharmacy and the costs are borne by consumers(AMA 2021; King, Watson and Scott 2017; PC 2015). As noted by the Review of Pharmacy Remuneration
and Regulation:
The Pharmacy Location Rules have not established robust competition between independent
pharmacies in some locations. Rather, in some locations, either individual pharmacists or small
groups of pharmacists have been able to monopolise some or all pharmacies. This is inconsistent
with the objective of Australia’s competition laws. (p. 19)
At the same time, parts of the regulatory framework are often ineffective in delivering other intended benefits.
• Setting a minimum distance between pharmacies does not supports community access to pharmacies(including in rural and remote communities); and consumer safety would be better protected by regulating
conduct, rather than ownership (PC 2015, pp. 53–54).
• The rules may not have effectively safeguarded community ownership as intended. While almost allpharmacies are owned by pharmacists25, major pharmacy operators have ‘effective franchise agreementswith differing levels of control over the franchisee’26. And in 2018, the four major operators were estimatedto have 73% of market share (KordaMentha Restructuring 2018, p. 8). This level of concentration does notappear to be harmful to consumers — rather, it exemplifies that ownership restrictions contribute little
benefit if any. Indeed, to the extent that such laws restrict the number of pharmacies, they are more likely
to lessen competition.
• While the regulations attempt to improve accessibility, there are fewer pharmacies per head of population.
When the location and ownership rules were introduced, the population-to-pharmacy ratio was 3000 people per
pharmacy — this increased to an estimated 4365 in 2014 and 4426 in 2022 (Chemist Warehouse 2016).
Current regulations that have the stated aim of reducing market concentration are likely to instead reduce
competition and establish local monopolies, with little countervailing benefit. These impediments to competition
are purely due to the regulatory framework and should be changed by governments immediately.

25 All pharmacies are owned by pharmacists with the exception of a small number owned by friendly societies undergrandfathering of previous legislation (Sub. no. 112, Pharmacy Guild of Australia, p. 2).
26 KordaMentha Restructuring (2018, p. 8).
34

Competitive and dynamic markets

There are broader questions about the role of pharmacists alongside other health professionals, and whether
reform is warranted regarding scope of practice (discussed in volume 7).

Recommendation 3.3
Improve competitive pressures in highly regulated sectors

The Australian Government should remove impediments to competitive pressures in sectors where it has
a substantial regulatory footprint. In the first instance, this could include:• as part of a broad review of Australia’s risk protection and social insurance arrangements(recommendation 3.1) assessing regulatory arrangements in private health insurance and theirimplications for competition, health outcomes and productivity• removing anti-competitive regulations on the ownership and location of pharmacies.
Other sectors where the Government has a large regulatory footprint should similarly and subsequently be
examined to remove any impediments to competitive pressures that are not supporting a broader social orenvironmental policy objective.

Improving outcomes in publicly-funded and provided services
Governments can play a central role in promoting quality, accessibility, and efficiency in the delivery of
non-market services. They have an ongoing role in making sure services work together towards the intended
objectives, particularly for consumers of the services. The Commission has previously commented on
governance arrangements and service delivery in a range of publicly funded services.
• The potential to promote efficiency in health services is discussed in full in the Commission’s (2021a)
information paper Implementing Innovation Across the Health System.
• The Commission has previously identified that the social housing system in particular is an area requiring
reform. A suite of policy recommendations were made in the Commission’s Housing and Homelessness
Agreement Review (PC 2022e).

Competitive markets in human services
Competition and contestability in markets are a means to an end — improving the effectiveness of service
provision for consumers. In the past decade, some competition and user choice have been introduced to
improve delivery of publicly-funded human services, with many now delivered by a mix of public, private andnon-profit service providers. While competitive pressures in markets can help to improve the efficiency withwhich services are delivered, they have their limits in achieving social welfare outcomes, particularly inregions with a sparse population and few services available over which consumers can exercise choice. As
noted previously by the Commission:… greater informed user choice, competition or contestability will not always be beneficial, and not
all areas of human services are amenable to these mechanisms. The costs and benefits of areform option depend on the characteristics of the people accessing the service, thecharacteristics of the service itself and the market conditions where service providers and users
interact. (PC 2017b, p. 64)
To the extent that competitive pressures do not create the incentives needed to improve quality andefficiency in the delivery of a particular human service, there is a clear role for governments to use policy and35

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

regulatory frameworks to achieve social and efficiency objectives. To this end, there are a number ofpotential areas of productivity-enhancing reform in human services.
First, reforms to policy and regulation can aim to improve incentives for service providers.
• Consumer protections often focus on input regulation, dulling service provider scope to alter inputs in orderto improve either efficiency or quality of service deliver. While licensing and registration are often
indispensable in human services (in particular, with regard to criminal histories and working with vulnerable
people), complementary measures that focus on outputs are often underutilised (discussed in volume 7).
• One of the key productivity benefits of competitive markets is that they can provide incentives for businesses
to innovate and adopt best practice. In the absence of such incentives, the frameworks through which
services are funded and regulated can be used by governments to encourage innovation. A number ofpotential improvements to the delivery of health and human services are discussed in volume 5.
Second, there is scope to remove complexities between different schemes and programs across human services
to more readily enable providers to offer their services in multiple markets. For instance, allied health providers
operating under different federal government schemes face duplication in compliance burdens by having toregister with each scheme. Providers are also paid different amounts for similar services under the different
schemes. There is likely scope for a more coordinated approach to administration and pricing.
Third, there may be a number of practical ways to facilitate more user choice. With regard to aged care,
Yong et al. (2020) argue that private sector involvement alone may not improve outcomes in practice, as:… even with perfect information on prices and quality, consumer choice is often restricted to local
areas since most consumers only search for aged care services around where they live.
Competition in aged care is localised, meaning that providers enjoy substantial market power if
there are few competitors in the local market. (p. 3)
In some cases, digital platforms can give consumers more choice in some aspects of service delivery, forexample where they facilitate a more user-centric model of service delivery. However, the presence of digitalplatforms alone is unlikely to substantially increase the number of available workers in a local area.
Fourth, a key barrier to competition in some areas of human services is labour supply. The lack of suitably
qualified workers is a barrier to competition and quality of service in the care sector, particularly in lesspopulated locations. Labour supply in care occupations is influenced by both wage and non-wage factors. A
number of policy levers could be used to address labour shortages, and thereby, competition in the care sector.
• Pay and conditions are likely to be influential in attracting and retaining workers in human services. 27 The
certainty and timing of payment may also be important, given that individual care providers can reportedly
face delays in receiving their payments, even where the services are fully funded. 28

27 In aged care, for example, the Royal Commission into Aged Care Quality recommended increases in award wages

and other remuneration, and in 2022, the Fair Work Commission determined a 15% increase to wages in those awards.
28 The Payment Times Reporting Scheme requires large businesses and large government enterprises to report their small
business payment terms and times (Treasury nd). Delays can occur in providing payments to service users, who then havethe autonomy to arrange payments to providers, as per the user-centric model. This can occur for several reasons, including
where clients have exceeded their allocated funds, or due to timesheet processing. There are potentially a number ofdifferent ways to improve the timeliness of payment without removing user autonomy — for instance, payments could be
subject to a bulk-billing function similar to Medicare. Delays in government-provision of payments could be subject totransparency mechanisms, as is the case with government enterprise payments to small business.
36Competitive and dynamic markets• Governments are responsible for ensuring adequate funding of human services. To the extent that
services are funded from an efficient tax base, this will reduce the marginal excess burden associated withservice provision, hence making funding levels more sustainable.
• To some extent, the supply of labour will continue to depend on migration policy settings (discussed involume 7).
The Commission recently concluded that platforms in aged care can play an important role in filling the workneeds of the sector, in part because some workers prefer the flexibility associated with platform work, whileusers often benefit from greater choice of in-home care (PC 2022c). In order to derive ongoing benefits fromplatform work in human services delivery, governments will need to ensure that platform work is
appropriately regulated (discussed further in volume 7).

Competition with government business enterprises
Governments can contribute directly to more competitive and dynamic markets by ensuring that their own
government business enterprises (GBEs) do not enjoy competitive advantages by virtue of public ownershipthat effectively stymies the activities of private sector competitors. The regulation of competitive neutrality
plays a significant role in a relatively narrow set of industries (where GBEs face competition or the prospectof competition). Despite this, competitive neutrality has potentially material implications for productivity.
First, GBEs tend to operate in industries that were historically networks with natural monopoly characteristics,
but were increasingly open to competition (often as technology progressed and the economy grew insophistication). This includes NBN Co, Australia Post, Moorebank and some urban passenger transport (states
and territories). These industries provide infrastructure or inputs relatively broadly across the economy.
Second, competitive neutrality deals with aspects of competition that make a material difference, particularly
given the size of the GBEs and their competitors. Issues of debt neutrality in particular (where GBEs haveaccess to finance on favourable terms) can amount to material advantages. This not only has implications forcompetition in those industries, but as is the case with other forms of industry assistance, it would havedistortionary effects on investment generally.
In its recent investigation of a complaint against NBN Co, the Australian Government Competitive Neutrality
Complaints Office (AGCNCO) made recommendations relevant to competitive neutrality in the broad,including that Treasury develop guidance material on:• how to calculate the cost savings associated with an implied guarantee of lease agreements• how to calculate the difference between the actual and benchmark cost of debt where no direct
market data are available• how to avoid excessive compliance and administrative costs in setting and collecting debt
neutrality adjustment payments for line-of-credit type debt
• how to calculate the cost savings associated with unpriced loan extensions and the premature
payout of fixed-term loans• how businesses should select a value for the 10-year bond rate under the risk broad-banding
approach for setting a benchmark commercial rate of return on assets, as specified in theAustralian Government Competitive Neutrality Guidelines for Managers• the appropriate risk premium level to assign to a low-, medium- or high-risk assessment underthat broad-banding approach. (PC 2022a, p. 20)
A broader question for Australian governments is whether the regulation of Competitive Neutrality is still fit
for purpose. Typically, competitive neutrality is not enforceable in a court of law — recommendations are37

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportprovided to ministers and treated as a matter of public policy. Such recommendations are routinely ignored
at the state and commonwealth level.
The Harper review recommended a review of competitive neutrality. One such review was initiated at theCommonwealth level in 2017, but was not completed. Similar reviews were initiated and abandoned in somestates. Only New South Wales is continuing to undertake its review of NSW competitive neutrality regulations(undertaken by IPART).

Finding 3.3
Increasing government involvement in some sectors can have implications for competition

Governments can play a central role in promoting quality, accessibility, and efficiency in the delivery of
non-market services, particularly where they are able to:• improve incentives for service providers, while removing complexities between different schemes andprograms across human services to more readily enable providers to offer their services in multiple markets• avoid locking in traditional provision models that inhibit innovative options, particularly in areas where
markets are thin or labour is hard to attract• be vigilant about the unintended consequences for competition in markets where government businessenterprises operate.

38

A better environment for productive investment

2.

A better environment for
productive investment

Key points
Efficient investment and productivity go hand in hand. High multi-factor productivity growth canstimulate investment. Ideas and innovation are often embedded in new capital.
• Low investment can be a symptom, as much as it is a cause, of low productivity growth.
Australia’s business investment as a share of GDP has declined relative to its long-run average inAustralia, as it has across a number of advanced economies. This likely reflects both structural andcyclical factors.
• Overall business investment levels do not appear to have been particularly responsive to declining costs ofcapital. It is unclear whether the apparent rise in risk premia during a period of unconventional monetary
policy will be sustained as risk free rates normalise.
Policy should not attempt to promote investment for its own sake. Nor should it try to ‘reverse’
long-term structural shifts, such as the growth of the services economy.
• Specific tax incentives aimed at bringing forward investment are unlikely to boost long term productivity
growth. The effects of taxation on the incentive to invest are better dealt with via structural tax reform rather
than one-off measures.
When the economy is close to full employment, there is not a strong policy case for governments toincrease public investments as a macro-economic response to fill a perceived gap left by low private
investment. This might work as a counter-cyclical measure in times of low aggregate demand, but thesame logic does not apply on the supply side, especially in a full employment economy.
• Governments can nonetheless play an important role in the efficient provision of public infrastructure, andminimising the distortionary effects of policy and regulatory interventions.
• Public projects should always be rigorously assessed for social benefits, especially when the opportunity
costs for scarce labour and other resources are at a premium. Commonwealth and State Governments could
review the appropriate application of discount rates in project assessment and cost benefit analysis.
• More accurate pricing (e.g. of transport infrastructure) can facilitate more efficient investment and in somecases reduce the need for costly new projects.
Policy should mainly focus on removing barriers to private investment.
• Complex planning regimes and major project assessments can be improved.

39

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

2.1

The investment challenge

Investment is a bet on an uncertain future. It involves an up-front cost in anticipation of a possible stream of
future revenues or benefits. In the real (non-financial) economy, investment almost always involves someform of change — a new production process, a new business, a new product. As a result, investment andproductivity growth tend to go hand in hand. Both usually involve a degree of disruption.
Investment decisions depend on the ability of an investor (entrepreneur) to perceive an opportunity, havethe appetite to take the associated risk and the access to the necessary resources and finance toimplement the change.
Conventional economic theory implies that investment causes productivity, through a higher capital to labour
ratio (i.e. capital deepening), which tends to mean more output per hour worked (i.e. labour productivity).
This is partly true — as noted elsewhere in this report, new technology can replace tasks, improve processes
and thereby augment human labour. But in many ways, investment is a symptom of productivity growth asmuch as it is a cause. When new (productivity-enhancing) ideas are being generated and adopted; whererisk appetite is strong and regulatory uncertainty minimised, investment will tend to occur.
Non-mining business investment in Australia has generally trended lower as a percentage of GDP overrecent decades (figure 2.1). Similar patterns have been observed across a number of other advanced
economies (Debelle 2017; Hambur and Jenner 2019; Minifie 2017), suggesting that structural factors may beplaying a role. Post-global financial crisis, lower than average capacity utilisation rates in key Australian
sectors may have also made a contribution. While business investment intentions for 2022-23 have started
to increase in levels terms (figure 2.2), following a notable increase in capacity utilisation rates during
COVID-19, additional factors may have contributed to subdued investment growth over recent years and areversal may necessitate changes in a number of policy areas.

40

A better environment for productive investment

Figure 2.1 – Non-mining investment has stagnateda. Private capital formation, 1959-60 to 2021-22, current prices
400
350

billion ($)

300
250
200
150

100
50
0
1959-60

1969-70

1979-80

1989-90

All GFCF less ownership transfer costs

1999-00
Mining GFCF

2009-10

2019-20

Non-mining GFCF

b. Private capital formation as share of GDP, 1959-60 to 2021-22
25

Share (%)

20

15

10

5

0
1959-60

1969-70

1979-80

All GFCF less ownership transfer costs

1989-90

1999-00
Mining GFCF

2009-10

2019-20

Non-mining GFCF

Source: ABS (Australian System of National Accounts, 2021-22 financial year, Cat. no. 5204.0, tables 1 and 52).

41

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Figure 2.2 – Businesses expect to increase investment in the next two years
Capital expenditure intentionsa
180
160

Billions of dollars

140
120
100

80
60
40
20
0
2007-08

2009-10

2011-122013-14
Mining

2015-162017-18

Non-mining

Total

2019-202021-22a. Forecasts are firms’ expected capital expenditure; adjusted for past average differences between expected andrealised spending.
Source: Productivity Commission estimates based on ABS (Private New Capital Expenditure and Expected Expenditure,
Australia, March 2022, Cat. no. 5625.0).

What explains subdued investment growth?
Two aspects of aggregate investment are useful to keep in mind in unpacking the likely causes of thedecline: first, as noted above, aggregate investment is made up of individual investment decisions madewithin the relevant business environment; second, aggregate investment reflects the composition of theeconomy, and the heterogenous experiences of different sectors.

Investment decision-making
Businesses make investment decisions based on expected net returns in the context of uncertainty. These
expectations are a function of the business’s own capabilities as well as a range of external factors — thepolicy and regulatory environment, the prevailing and expected future economic climate, current and forecast
levels of demand, borrowing costs — viewed through a lens of risk and uncertainty. Some international
evidence suggests that the global decline in investment is related to slower economic growth (Gutiérrez andPhilippon 2016). However, for non-mining investment in Australia, the RBA recently found that:… [investment] spending … has been even weaker than predicted by our standard aggregate
model. Similarly, we have examined firm-level data and found that corporate investment has been
consistently weaker than would be predicted based on past relationships with Tobin’s Q (aforward-looking measure of investment opportunities). (Debelle 2017, p. 6)
While financing constraints have been found to play a role in explaining weak investment outcomesinternationally, Australian business data suggests that the cost and availability of finance is generally notweighing on investment in Australia (Debelle 2017, pp. 9–10). Aside from recent increases, nominal
borrowing costs have been at relatively low levels for the past decade (figure 2.3, panel b).

42A better environment for productive investment

At the same time, profitability rates have been relatively stable (figure 2.3, panel c), which intuitively, would
contribute positively to investment growth. Generally speaking, declining borrowing costs should stimulate
investment growth, bringing down private returns to capital. But instead, the evidence points to a growing
wedge between risk free rates and the private return to capital. This might suggest alternative influences on
business decision making.
Figure 2.3 – Australian debt, profits, and the cost of borrowing
a. Australian private debt to GDP

b. Australian 10-year bond yieldc. Australian company gross operating
profits as percentage of GDP
30

10
9
8
7
6
% 5
4
3
2
1
0

25
20
% 15
10

5

1994
1997
2001
2004
2007
2010
2013
2016
2020

0

1995
1998
2001
2004
2007
2010
2014
2017
2020

1995
1998
2001
2004
2007
2010
2013
2016
2019

220
210
200
190
180
% 170
160
150
140
130
120

Source: OECD (OECD.stat, Financial indicators – stocks: Private sector debt, 1995 to 2021); RBA (Capital Market Yields– Government Bonds – Monthly, July 2022, July 1995 to July 2022); ABS (Business Indicators, Australia, June 2022,
Cat. no. 5676.0).

A range of factors are relevant to individual investment decisions, including the opportunity cost of capital,
perceptions of risk, and the degree of market power enjoyed by firms.
The market risk premium (the additional return investors require to be compensated for taking on risk) has
increased in Australia, particularly since the global financial crisis (figure 2.4).29 While higher risk premiums
are likely to have contributed to subdued investment growth, it is unclear to what extent they reflect
perceptions that risks in general have increased (i.e. a greater likelihood of negative events, or that their costhas increased), or changing attitudes to risk (i.e. increased risk aversion) or simply increased responses to arisky environment. The market risk premium is likely to rise when various financial events alter firm
perceptions of risk and the likelihood of an adverse outcome.
Economic shocks and events are also likely to influence investment decisions in other ways. The opportunity
cost of capital is likely to have changed during the mining boom (from about 2010 to 2012), skewing
investment at the time towards the mining sector. Finally, market power enjoyed by firms may increase therate of return achieved on those investments, relative to what might otherwise be the case.

29 An estimation of the relative contribution of each of these factors to the wedge between the private return on capitaland risk-free rates can be obtained by adjusting the standard riskless user cost of capital to reflect changes in market
power and changes in risk. The Commission is undertaking separate research analysing risk in business decision
making, with publication forthcoming.
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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Figure 2.4 – Components of investment to risk-free rate spread
Five year moving average

MPK to risk-free rate spread

16
14

12
10
8

6
4
2
0

Depreciation and capital growth

Risk premiumMarket power

Source: Productivity Commission estimates.

It is difficult to establish empirically whether risk aversion itself has risen in Australia over the past decade.
Qualitative evidence suggests that businesses have tended to require expected returns on capital to exceed
the cost of capital by a high margin (i.e. high ‘hurdle rates’) (Lane and Rosewall 2015). Australian survey
evidence suggests that hurdle rates have remained broadly constant even while borrowing costs have fallen
over the past decade (Edwards and Lane 2021). Consistent with these observations, data from
Australian-listed companies show that the aggregate return on invested capital (ROIC) has been ‘high andrelatively constant over the past 20 years, notwithstanding a large decline in 2020’ (p. 14). To the extent that
hurdle rates remain broadly unchanged while borrowing costs fall, business investment will be lower thanwhat we would otherwise expect, weighing on productivity growth over time.
It may be premature to conclude that business risk appetite in Australia has fallen (leading to higher risk
premia in investment decisions).
There is some evidence that historically, the risk premium and the risk-free rate have tended to move in
opposite directions, leaving the overall hurdle rate quite stable over time. Jordà et al. noted:
Curiously, the bursts of the risk premium in the wartime and interwar years were mostly aphenomenon of collapsing safe rates rather than dramatic spikes in risky rates. In fact, the risky
rate has often been smoother and more stable than safe rates, averaging about 6%–8% across all
eras. Recently, with safe rates low and falling, the risk premium has widened due to a parallel but
smaller decline in risky rates. But these shifts keep the two rates of return close to their normal
historical range. Whether due to shifts in risk aversion or other phenomena, the fact that safe
rates seem to absorb almost all of these adjustments seems like a puzzle in need of further
exploration and explanation. (Jordà et al. 2017, p. 5)
Risk-free rates fell, and risk premia appear to have risen, in the decade following the global financial crisis –a period of highly expansionary monetary policy. It will be important to observe the movement in hurdle rates
as monetary policy and risk-free rates normalise. At that point, we will be better able to judge whether
business risk appetite has fundamentally shifted over the past two decades or so.

44A better environment for productive investment

Structural changes are having a limited effectAggregate measures of investment can mask the heterogeneity of experiences across the economy. For
instance, technological progress has given rise to new opportunities for investment, and this has occurred
unevenly across sectors.
Long-term structural changes in the economy are likely to have had an enduring effect on the nature andlevel of investment. In particular, the shift towards a services-driven economy may mean that a lower rate ofinvestment in physical capital may be necessary, while investment in intangibles (such as trademarks,
software and managerial capacity) are likely to play a stronger role (PC 2020b, pp. 10–11). Minifie (2017)
pointed to a group of service industries that were ‘less than half as capital intense as the average non-mining
market sector’, noting that they had comprised half of market sector output in the early 1990s, growing toalmost two-thirds in 2017.
Other evidence suggests structural change has only had a limited effect on investment levels since the GFC.
Hambur and Jenner (2019) use Australian firm-level tax data30 to demonstrate that compositional change inthe economy explains only a ‘very small share’ of the decline in post-GFC investment. They found thatinvestment declined for firms regardless of industry, age, or cohort. Moreover, the overall investment
intensity rate (the change in capital stock relative to output) declined by about 5% in the past decade, in partdue to a lack of productivity growth and lower depreciation rates.
Private capital expenditure has varied across industries over time (figure 2.5). Investment in manufacturing
reduced significantly as a proportion of capital investment — largely coinciding with reductions ingovernment assistance to the sector, general reduction in manufacturing output, and a broader structuralshift towards resources. The composition of Australia’s services sector will have a bearing on the rate ofcapital investment required to deliver productivity improvements.
Investment levels are, not surprisingly, also related to firm size. The decisions of a relatively few larger firms
have often driven trends in observed aggregate investment. The RBA found that small and medium enterprises(SMEs) comprised over 99% of non-mining firms, but accounted for only about 60% of non-mining investment(Dynan 2021, p. 3). Firms with output between $50 million and $5 billion represented just 0.3% of all firms, butwere responsible for one-third of all investment. The largest 30 firms accounted for almost 10% of investment.
Access to credit for investment can be more complicated for SMEs. While new sources of finance have become
increasingly important for SMEs (PC 2021e),31 the availability of credit for SMEs more broadly and its uptake will
be influenced by further development of the non-bank lending sector, as well as greater awareness among SMEsof new financing options (pp. 41–46). Reforms to the bank capital framework came into effect from January 2023
may also make SME lending more attractive to banks at the margin (Bank and Lewis 2021, p. 45).

30 Using the Business Longitudinal Analysis Data Environment (BLADE) dataset.
31 Based on data from September 2021, the Commission found the main remaining gap was in the market for unsecured

finance between $250 000 and $5 million (p. 39).
45

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Figure 2.5 – Private capital expenditure has varied by sector
Quarterly private capital expenditure by industry, share of total
100
90
80
70
60
%

50
40
30
20
10
0
Sep-1987 Sep-1991 Sep-1995 Sep-1999 Sep-2003 Sep-2007 Sep-2011 Sep-2015 Sep-2019

Manufacturing
Transport, postal and warehousing
Wholesale and retail trade

Construction
Rental, hiring and real estate services
Other services

Source: ABS (Private New Capital Expenditure and Expected Expenditure, Australia, March 2022, Cat. no. 5625.0, table 7).

Emerging trends that will influence investment
The evidence suggests that a number of factors have an influence on investment decisions, and it is difficult
to pinpoint which factors have most shaped investment trends in Australia and internationally. It is also clearthat many drivers of investment are subject to change. Policymakers will need to consider how emerging
trends (as well as uncertainty) could affect the investment landscape in the medium term.

Trends in global foreign investment
While foreign direct investment (FDI) makes up a relatively small proportion of total investment in Australia, it
plays an important role given Australia’s position as a net importer of debt-based financing and a net
exporter of equity-based financing. FDI plays a larger role in some industries than others — the value of FDI
applications in the past 5 years has favoured services, commercial real estate, and heavy industry(PC 2022f). It is also associated with innovation at the firm level (Majeed and Breunig 2021).
Inbound FDI flows have fallen as a percentage of GDP in recent years for Australia and several advanced
economies (figure 2.6). As a percentage of GDP, Australia’s inbound FDI began to decline prior to thepandemic and, as at 2021, had not rebounded to pre-pandemic levels. Other advanced economies have also
experienced declining FDI in proportion to GDP.
FDI trends cannot be wholly attributed to Australian policy, as they also depend on conditions in othercountries competing for investment, as well as conditions in source countries. While it is impossible to predict46

A better environment for productive investment

how global investment patterns will evolve, it would be valuable for Australia to remain open to harnessing
opportunities — a number of regulatory frameworks can affect FDI decisions at the margin (chapter 3).
Figure 2.6 – FDI inflows to Australia have declined
Inbound FDI flows as a share of GDP, 2010 to 2020
7

6
5

4
% 3

2
1

0
2010
-1

2011

2012

Australia

2013

2014

European Union

2015

2016

2017

United States

2018

2019

2020

OECD members

Source: World Bank (2022a).

The investment needs of the climate transition
The transition to a net-zero emissions economy by 2050 will require a significant scale of new investment in
the Australian economy. The Australian Energy Market Operator estimated that the National Electricity
Market would require about $170 billion of capital investment to 2050.32 These investments would be
required to address a forecasted doubling of electricity consumption from the grid by 2050, due to new
demand sources (e.g. transport, heating, cooking and industrial processes) and the removal of a large
proportion of coal generation. Deloitte estimated that the transition to net zero by 2050 would require$70 billion of capital reallocated away from emissions intensive assets, and $420 billion of additional
investment compared with an economy not transitioning (DAE 2022, p. 2).
While public investment can play a role in addressing market failure, the risks associated with industry
assistance will likely be prominent in Australia’s decarbonisation efforts. Significant ongoing public
expenditures have already been put towards supporting emerging technologies. While new technologies willbe crucial for decarbonising, there are risks that selected technologies fail to commercialise, or proveineffective in the mitigation task, or provide poor additionality (PC 2022f). And while some degree of risk isinherent in such investments, governments can often be reluctant to (or persuaded not to) abandon
investments when technologies fail to develop (Banks 2008, p. 15; Emmery 1999; Neely 1993; The
Economist 2010; 2022). Regular and transparent review of public expenditures will remain crucial tominimising the potential for such market distortions.

32 This includes investment to achieve a nine-fold increase in grid-scale wind and solar capacity, a three-fold increase in the firming

capacity (dispatchable storage, hydro and gas-fired generation) and a five-fold increase in distributed solar (AEMO 2022).
47

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

As such, private investment will be needed in a relatively large scale. In addition to the general landscapethat affects investment broadly, the incentives for investment in decarbonisation will be key — including how
mitigation is priced, and the transparency and rigour of offset markets. In the absence of an economy-wide
price on carbon emissions, there is a greater risk that public and private investment fails to reach the mostefficient and effective technologies. A technology neutral approach will be important to guide investment totechnologies that will promote least-cost abatement (for instance, in carbon capture and storage, energy
generation, and energy storage) (volume 6).

Implications for policy
The observed subdued investment growth warrants some attention from policymakers. While measured
investment levels may underestimate investment in intangibles, which is increasingly important to service
industries,33 subdued investment growth could reflect some weakening of key drivers of productivity growth,with potentially significant implications for Australian living standards.
It is also important for policy to reflect the fact that productivity and investment are interrelated.
Productivity-enhancing reforms can promote economic growth and improve returns to investment. In turn,investment can be the proximate cause of productivity growth. But interventions to simply boost investment
levels directly cannot be guaranteed to boost productivity.
Policy should not attempt to promote investment for its own sake. All investment carries opportunity costs —it uses up scarce resources that could otherwise be used for current consumption. An important role forgovernment is ensuring that investors face prices (output prices, input prices and interest rates) that are notdistorted and broadly reflect social costs so that investments increase national income. In practice, thismeans that policy settings would neither discriminate in favour of particular kinds of investment nor
consumption over investment.
The objective should not be to ‘undo’ or ‘reverse’ structural causes, to the extent that structural shifts
reflect Australia’s comparative advantage (and relative prices). The relative decline in investment has notbeen due to any singular consistent cause or trend, despite relative consistency across time and indeed inother advanced economies. In part, lower investment intensity may be the result of developments that are
not wholly undesirable, such as structural shifts in the economy and the reliance on longer-lived assets. It
may also reflect perceptions of and attitudes to risk, or undesirable developments, such as low productivity
growth that reduces returns on investment.
A broader view of policy is required. The hurdle rates for investment observed in Australia have been
relatively consistently high over the past decade, suggesting higher risk premia offsetting lower capital costs.
This suggests that any attempts by governments to influence investment decisions will require considerationof a broader mix of policy settings — not only the cost of funds, but also those policies that influence thebroader economic climate and might unduly increase the uncertainty about future benefits.
Broadly, the suite of policy issues discussed across this report will have a bearing on investment: for
instance, aspects of foreign investment are discussed in the context of trade policy settings (chapter 3); andAustralia’s climate change policy settings (volume 6) will help to determine the efficiency of resource
allocation across the economy.

33 Volume 5 of this report — Innovation for the 98% — details capital spending in physical and intangible assets over the

past 60 years.
48

A better environment for productive investment

2.2

Taxation, investment and productivity

The tax and transfer system has a direct influence on investment decisions. By taxing some activities athigher rates than others, the system can skew incentives and economic activity away from more productive
activities. Transitioning Australia’s tax system towards less distortive, more efficient approaches is an
enduring policy priority. It will become more salient as governments contend with the ageing population,changing consumption patterns and the need for fiscal repair.
While specific tax incentives could aim at bringing forward investment, piecemeal tax incentives alone areunlikely to boost long term productivity growth. The effects of taxation on the incentive to invest are better
dealt with via structural tax reform rather than one-off measures.

The role of taxation in driving productivity
At a broad level, several aspects of the tax system warrant particular attention. The tax system can influence
productivity growth through five main channels:
Skilled labour supply decisions — particularly via income and payroll taxes, which can affect labour
market participation, hours worked, incentives for further human capital investment and incentives to migrate
to Australia. These effects can vary with gender, household structure, age and income. They can becompounded by aspects of the transfer system, which can lead to high effective marginal tax rates. Other
payments, such as child care subsidies, can alleviate adverse incentives over some income ranges.
Labour participation may or may not have a large impact on productivity. A higher participation rate primarily
increases GDP per capita, rather than GDP per hour worked. However, productivity can be affected to theextent that highly qualified workers reduce their hours worked, or work for a period of time in lower skilledoccupations. Decisions about human capital investment, entrepreneurialism or decisions to switch jobs areanother channel through which labour taxation can influence productivity.
Saving and investment decisions can be distorted due to the varying tax treatment of different savings andinvestment options. If investment and asset allocation decisions are based more on preferential tax
treatment than underlying economic return, productivity can be adversely affected.
Gaps between the corporate tax rate and marginal personal income tax rates, differential tax rates for large
and small companies, differences in statutory depreciation rates and the non-deductibility of equity all havesome potential to distort outcomes.
Differences in tax rates between categories of taxpayers can also create distortions in savings andinvestment over time. For example, the greater the differential between corporate taxes and personal income
taxes, the greater is the incentive for company owners to hold profits as retained earnings and delay theirdistribution as personal income to later periods of life when they face a lower marginal tax rate.
Ease of asset transfers and efficient capital allocation can be significantly impacted by transaction taxes
like stamp duty. These taxes can hamper worker mobility and housing choice, and be a barrier to efficienttransactions, which would see assets transferred to a higher value use.
For example, Shiran (2020) finds in a study of Melbourne residents that stamp duty significantly reduces mobilityof homeowners, and locks in longer work commute times. Davidoff and Leigh (2013) find that a 10% increase instamp duty lowers housing turnover by 3% in the first year and by 6% if sustained over a 3-year period.
Efficient allocation of capital is also relevant in achieving efficient user charging for public infrastructure suchas roads. The current fuel excise system, while a significant traditional source of revenue for government, is
not sustainable for this purpose (given the growing share of electric vehicles).
495-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Tax settings can affect the ease of entry and competition through both consolidation rules and thenon-neutrality of taxation of corporate debt and equity — both of which could contribute to incumbency bias,
particularly if new firms are more likely to initially be financed through equity. For example, some new firms inthe services sector might have limited tangible business assets against which to borrow, relying more on
equity to finance initial operations. Tax arrangements that become less favourable as businesses growbeyond a threshold size can also impede competitive pressure.
Risk management can be hampered at the margin by state insurance taxes. The asymmetric treatment of
profits and losses could also work to diminish firms’ risk appetite. Alternatives that have been suggested(though none are necessarily straightforward) include some loss refundability (such as via a business cash
flow tax), the carry-back of losses or the indexation of losses carried forward.

Towards greater neutrality and efficiency
In general terms, both tax rates and tax neutrality issues will be highly relevant to productivity. The marginalexcess burden (i.e. efficiency loss) from a tax tends to rise exponentially with the tax rate. Working towards
greater neutrality of tax — for instance, between firms, between savings vehicles and, where appropriate,between labour and capital income — should have positive impacts for tax efficiency and productivity.
The question of neutrality between equity and debt will become even more salient depending on future
approaches to dividend imputation. Imputation has been a central feature of the Australian tax system sincethe 1980s, addressing the double taxation of dividends that would otherwise occur. One effect of imputation
is to heighten the ‘home country bias’ of domestic investors, including superannuation funds, as noted by the
Tax and Transfer Policy Institute (Murphy 2018). The Retirement Income Review (Callaghan Review) notedthat between now and 2060, the scale of Australia’s superannuation assets under management are
projected to rise from about 110% of GDP to just under 250% (Treasury 2020). While the extent to which thishome country bias impacts Australia’s productivity growth is not known, the question will likely arise as to thedesirable (and sustainable) level of home country bias that is appropriate once investible funds are of such ascale relative to the domestic economy.
There is a view that despite Australia’s dividend imputation system, there is the potential for investment to be
influenced by corporate tax treatment. A number of reforms have been canvassed to create greater neutrality
between debt and equity financing, including an allowance for corporate equity (ACE), and allowance forcorporate capital (ACC), comprehensive business income tax (CBIT) and business cash flow tax. The Tax
and Transfer Policy Institute has favoured the ACE, as it poses fewer implementation challenges (Sobeck et
al. 2022). It has the attractive attribute of effectively taxing marginal investments (those making a normal rateof return) at zero, thereby potentially encouraging new investment.
In addition, the tax and transfer system can affect productivity through its complexity. To the extent it absorbs
scarce resources for system compliance and administration, this can divert time and resources away from
more productive activities. As governments (state and federal) alter the tax system over the next decade,they should look to systematically transition the system to be more supportive of productivity growth acrossthe five domains outlined above.

50

A better environment for productive investment

Recommendation 3.4
Transition the tax system to invigorate productivity growth

In their use of the tax system for fiscal consolidation over the next decade, governments should, including
through the Council on Federal Financial Relations, systematically transition the tax system to besupportive of productivity growth through tax arrangements that:
•
•
•
•
•

promote skilled labour supply
improve tax neutrality in respect of savings and investment
encourage efficient asset transfers and capital allocation
foster market entry and competition
support efficient risk management by firms and individuals.

2.3

Improving the business environment for private
investment

While there may not be a strong policy justification for promoting investment for its own sake, or for using
public investments to fill a gap in private investment, governments can nonetheless avoid situations where
policy and regulatory interventions create undue barriers to investment (for instance, by ensuring that theregulatory environment meets its objectives as efficiently as possible).

Reducing the distortionary effects of public expenditure
Public investment decisions can have varying and sometimes countervailing effects on private investment.
For instance, public investment:• can promote private investment, partly due to private sector delivery of public projects but more broadly throughbenefits of using infrastructure and potential generation of spillovers throughout the economy (Debelle 2017)• carries opportunity costs that are heightened in times of relative scarcity of resources (such as a tightlabour market).
Under full employment conditions, the opportunity cost associated with any public expenditure and thepotential for crowding out will be heightened, not only in relation to other areas of public funding, but also in
relation to the resources available to the private sector.
The resource constraints associated with full employment are exacerbated by an environment where
Australian Government expenditure has reached peak levels — which are only partly explained by the
pandemic, and partly by related trends in industry assistance (box 2.1). The prevailing labour market
conditions provide additional reason to carefully assess the opportunity cost of using public funds.

51

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportBox 2.1 – Industry assistance creates distortions
Australian Government assistance to industry has reached historic high levels — even after excluding
economy-wide COVID-related programs of expenditure (figure below). Aside from once-off emergency
expenditures, significant amounts of expenditure have been committed over the next decade.
Some public expenditure programs deliberately or inadvertently discriminate in favour of a particular section of
the economy. This includes outlays, concessions, or other favourable conditions for particular sectors,
industries, or businesses of a particular type or size. To the extent that supports are material enough toprevent business exits, this reduces business dynamism and impedes more efficient allocation of resources.
Government assistance to industry would ideally be geared towards projects or sectors with significant
social spillovers that cannot be fully captured by private investors (that is, private investment alone will
not lead to the most productive level of investment). To best utilise scarce public funds, the government
should rigorously check that the spillovers reflect a failure of private investment markets. Costs andbenefits should be assessed, including the alternative uses of funds and potential to crowd out private
investment. With the current full employment conditions, it is important to consider the risk of reallocating
resources away from more productive uses to those with lower or less certain payoffs.
Industry assistance has increased in the past five years a
Net tariff assistance and budgetary assistance 2015-16 to 2020-21

Services

Budgetary Assistance 2020-21

Manufacturing

Budgetary Assistance 2018-19
Budgetary Assistance 2015-16
Net tariff 2020-21

Mining

Net tariff 2018-19
Net tariff 2015-16
Primary Industries

-2000

-1000

0

1000

2000

3000 4000$ million

5000

6000

7000

8000

9000

a. Excludes economy-wide expenditure programs such as JobKeeper, Boosting Cashflow for Employers, Backing
Business Investment, and the expansion of the Instant Asset Write-Off.
Source: Productivity Commission estimates.

One of the risks of industry assistance is that it can continue for a prolonged time without scrutiny. There are often
strong in-principle rationales for government intervention initially (for instance, with regard to the COVID-19
pandemic and climate change). But without sufficient policy scrutiny, in-principle rationales can provide ‘cover’ topoor public investment choices, open-ended assistance and rent-seeking behaviour (PC 2022f).

52

A better environment for productive investment

Improving the regulatory environment for private investment
Governments can promote investment by ensuring regulatory settings avoid undue impediments tocommercial decisions, without sacrificing the social benefits of regulation. The Commission has provided
numerous examples of regulatory areas where this would be advantageous, including regulatory approvals(PC 2013); and more efficient freight transport (PC 2020a). As noted in chapter 1, further simplification ofplanning and zoning regulations would not only facilitate competition (by reducing barriers to market entry)
but would allow better value use of scarce land resources. An additional area of policy with potentiallysignificant implications for investment relates to approval processes for major projects.

Approval processes for major projects
Survey evidence from Infrastructure Australia suggests that both investors and contractors viewed planningand environmental approval processes as a source of delay and uncertainty for project timelines(Infrastructure Australia 2021, p. 44). The costs of delays can vary. In oil and petroleum, the Commission has
previously estimated that delaying a major project by one year could reduce the net present value of returns
by 10–20% (simply by delaying income streams) (PC 2009, p. xxv).
Reducing the delay times associated with regulatory approval processes is a perennial challenge. From a
policy perspective, it should not be mistaken for an assumption that approval processes themselves are
redundant or poorly administered. Nor does it signify that the regulation of environmental and social impacts
should be reduced or removed, such that more projects are undertaken regardless of negative externalities.
Rather, if approval processes can continue to protect against social costs of major projects, while further
reducing uncertainty and delay, this could result in significant productivity benefits. And as noted byInfrastructure Australia, at an economy-wide level, the costs associated with delay to major projects will bemagnified by the scale of the upcoming infrastructure pipeline.
While it is beyond the scope of this report to investigate all regulatory approval processes in detail, one
recurring theme relates to delays caused by administrative complexity.

Addressing the complexity of approval processes
As noted by CME, businesses are often required to coordinate across multiple layers of government toobtain approvals, and the requirement to meet increasingly onerous conditions attached to many approvals(e.g. in relation environmental approvals) prompted concern over delivery times. CME noted that there is
duplication of similar types of information requested by different agencies for similar regulatory outcomesunder various legislations (CME, sub. 52, p. 4).
For public infrastructure projects, key planning and environmental approvals are typically obtained by thestate, with minor and technical approvals obtained by the contractor. Issues arise where:• Key decisions around design requirements are not made early in the process and mandatory
approval requirements are unable to be clearly defined and articulated. This creates a risk thatthe final design is likely to have elements requiring rework after contract reward, leading topotentially significant time and cost overruns.
• During delivery some smaller approvals require the contactor to consult or obtain consentsfrom numerous stakeholders, where it can be argued that the State can more easily manage.
(Infrastructure Australia 2021, p. 44)
In the resources sector, some approval requirements have been moved from the primary approval process into
the so-called ‘post-approvals’ phase, which lack statutory timeframes and reporting requirements (PC 2020e).

53

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

This can result in situations where primary approval processes are completed according to statutory
timeframes, only to leave uncertainty and delay in the post-approval processes.
Some have noted that for major public infrastructure projects, a key question relates to who should bare therisks of approvals and associated delays. For instance, among respondents to Infrastructure Australia’s
survey on risk, three quarters of private sector stakeholders felt that governments should bear the risks ofplanning approvals (along with 43% of government respondents).
For major projects arising from the private sector, one way in which the Australian Government reduces theadministrative complexity of approvals for major projects is through the Major Projects Facilitation Agency(MPFA).34 The MPFA is the Australian Government entry point for developers of projects over $20 million,
which assists by providing information on approvals, mapping critical approval pathways and processes, andraising issues with regulators.
A more substantial improvement to approval processes could be achieved through a ‘single-touch approvals’
system, which has been confirmed as a commitment of the Australian Government. This system will involve theAustralian Government accrediting State and Territory approval processes, providing the opportunity forbusinesses to obtain approval from a single application. Accredited approval processes will be subject to National
Environmental Standards, which will be integrated into existing accreditation arrangements. The implementationof single-touch approvals depends in part on how quickly the process of accreditation will proceed. And given thegradual nature of implementation that will result, the effectiveness of the system will also depend on the role andperformance of the new Environment Protection Agency (McCredie, Bergman and Smith nd).
The introduction of the single-touch approval system could eventually contribute significantly to improving thebusiness environment for investment. More broadly, policy must continue to ensure that approval processes
are both efficiently administered and are proportionate to the risks of the project.

2.4

Ensuring efficient public investment

Public investment can play a significant role as a key determinant of total investment in the economy. The
extent of public investment (and the choice of investment projects) should be guided by net social benefit,
taking into account the costs of taxation. Moreover, it plays a particular role in addressing market failure,often (but not exclusively) via the provision of public goods such as public infrastructure.
In many respects, there is a well-established literature on best practice for public procurement andinvestment. The Commission has previously recommended a number of improvements to the provision of
public infrastructure, including in the project selection stage (with strong cost-benefit analyses) as well as
proficient procurement processes (PC 2014). Rigorous assessment is all the more important when theopportunity costs of scarce labour and other resources are at a premium.
One challenge for governments relates to the application of best practice at the planning and procurement stages.
• The use of cost-benefit analysis is variable across government projects (volume 5). In some cases, suchanalysis is absent, or of poor quality, or is disregarded by decision-makers. Institutional and governancearrangements could be better designed to adopt the best practice elements of cost-benefit analysis (CBA) andto make the results a more prominent consideration for government officials in the project selection process.
• The choice of discount rates in the CBA process can lead to a wide range of forecast costs and benefits,depending on assessment of risk. There is always scope for discount rates to be chosen ‘conveniently’ to
34 Prior to 11 May 2017, functions performed by the Major Projects Facilitation Agency (MPFA) were undertaken by the

Major Projects Approval Agency (MPAA) and the Major Project Facilitation (MPF) Programme.
54A better environment for productive investmentemphasise potential benefits or downplay potential costs. A single discount rate is unlikely to beappropriate, as rates should vary with project risk (Harrison 2010). However, given the implications of wide
variations in discount rates in public procurement — both for industry and for the efficiency of public
investment — Australian governments could review the appropriate application of discount rates with aview to achieving a more nuanced approach.
An additional challenge for governments relates to the use of pricing mechanisms to manage infrastructure
usage, maintenance expenditure, and capacity, particularly with regard to road and public transport
infrastructure (discussed below).

Public road infrastructure
The provision of road infrastructure is a key area of public investment with a direct bearing on productivity,
and where mechanisms for funding and investment could be substantially improved. More efficient funding
and charging mechanisms could apply to the general provision and maintenance of roads and the costs ofurban congestion.

How public road provision and maintenance could be better funded
The construction and maintenance of public roads is funded from taxes and charges collected by all levels ofgovernment (box 2.2) and sometimes from tolls collected by private businesses. Most of the many
vehicle-related charges have some effects on the demand for vehicles and road use (net fuel excise,registration costs, parking levies, licence fees, revenue from goods and services taxes and fringe-benefits
taxes) but do so indirectly. Since 2004-05, there has been a relatively strong link between total road-related
taxes, charges and spending, suggesting that investment is affected by the aggregate revenue, thoughchanges in revenue collected from any given source is not strongly related to spending. Three tax sources are
more directly related to the marginal use of roads, though only one (tolls) has an explicit link to investment.
Tolls are charged on some freeways, mainly levied on a per-use basis, but sometimes using distance andtime of day as an aspect of the price. Investment decisions for toll roads are based on expected toll revenue,
which provides a link between investment for specific projects and demand or usage.
A ‘Road User Charge’ is levied on heavy vehicles via the fuel tax credit system (as a component of fuelexcise). The Road User Charge is 27.2 cents per litre of diesel used by heavy vehicles on public roads. In
addition, there are a highly-developed set of registration charges that depend on truck types, axle number
and trailer type (NTC 2022; PCC 2022). Charges are not explicitly distance-based at the individual vehicle
level, but reflect the average distance travelled and the estimated average road maintenance and capitalcosts incurred by classes of similar trucks. To the extent that trucks are used at similar capacity levels, thisresembles a distance-based charge levied at the truck level. The charges are not directly related to use ofparticular roads by individual trucks.
Fuel excise applies to all vehicles as a charge of 47.7 cents per litre. Fuel excise is only an indirect form ofroad user pricing (PC 2022f, p. 56). It does not differentiate between vehicles with different fuel efficiencies
and impacts on road surfaces and imposes no charge on road use by Australia’s growing fleet of electricvehicles since their fuel is not taxed. Fuel excise revenue has steadily declined as a proportion ofroad-related revenue in the past decade (figure 2.7). Ultimately, excise will become redundant as Australia’svehicle fleet is switched to non-polluting technologies. As recognised by the Australian Government in thecontext of its National Electric Vehicle Strategy:
Planning is also required as future fuel excise revenue declines from reduced consumption of
petrol and diesel. While this revenue is not currently earmarked for expenditure on roads, it is an55

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportimportant source of funding. In the long run, Australia will need a more sustainable and fair way to
pay for roads. (Australian Government 2022, p. 14)

Box 2.2 – Road funding is a shared responsibility
Generally, responsibility for the project management of capital and maintenance expenditure for road assets
lies with the State and Territory and local governments (for arterial and local access roads, respectively).
The Australian Government provides part or whole contributions to projects based on its investment
priorities and largely under the framework set out under the National Land Transport Act 2014 (Cth), andthe supporting National Partnership Agreement on Land Transport Infrastructure Projects (under theFederal Financial Relations Framework). The National Land Transport Act stipulates the conditions underwhich the responsible minister(s) may approve funding for individual projects. The National Partnership
Agreements set out Commonwealth investment priorities and outline the objectives of investment, roles andresponsibilities and further conditions and requirements on the particulars of projects.
The schedules to the National Partnership Agreements constitute a considerable portion of theCommonwealth’s infrastructure investment program, but do not reflect the full extent of its infrastructure
investment. Further details on Commonwealth funding arrangements are outlined below.
States and Territories fund or finance expenditure with own source revenues and grants from theCommonwealth, and also provide funding to Local Governments. Local Governments fund expenditurethrough own source revenue (such as rates) and grants. After accounting for grant funding, final road
expenditure by the Australian, State and Territory (excluding public non-financial corporations) and local
governments in 2014-15 was $4.8, $12.5, and $6.2 billion, respectively.
Source: PC (2017a).

Moreover, at the bowser, fuel prices are mainly determined by production costs and fluctuations in global
crude oil prices (as demonstrated by price rises in 2022 stemming from the war in Ukraine), rather than the
demand for local roads. The fact that fuel excise is a specific (flat) tax that is indexed by consumer prices
means that as fuel prices rise (fall) relative to overall prices, the effect of fuel excise on prices at the bowser
falls (rises), further disconnecting its impacts on road use. In any case, demand for vehicle fuels are highly
inelastic, with a 10% increase in prices reducing demand in the long run by about 2 to 3% (BITRE 2008;
Breunig and Gisz 2009; Brons et al. 2008; Galindo et al. 2015). While this makes excise a relatively efficient
source of revenue, it limits its impact on road use.

56

A better environment for productive investment

Figure 2.7 – Fuel excise revenue is declining in relation to road-related expenditure
Net fuel excise and Commonwealth road-related expenditure as a share of totalroad-related expenditure
Per cent of total road-related expenditure60

Net fuel excise
50

40

30

20

Commonwealth road-related
expenditure

1002008-092010-11

2012-132014-152016-172018-192020-21

Source: BITRE (2021).

There are numerous problems with existing road funding and investment models. They do not limit roadcongestion, nor provide investment signals about where roads should be built and to what capacity. Neither
do they set charges that reflect the road damage associated with vehicles with different weights on roads
with different levels of resilience to damage, nor do they use a sound framework for pricing that balances
efficiency, distributional concerns and meeting (some of) the fixed costs of construction.
Recognising that Australian Government excise revenue will fall with electrification of the vehicle fleet,various jurisdictions have proposed or introduced distance-based charging for electric vehicles:• In July 2021, Victoria implemented a road user charge for all Victorian-registered zero and low emission
vehicles (the ZLEV road-user charge), currently levied at 2.6 cents per km for electric vehicles and2.1 cents per km for plug-in hybrid electric vehicles. Registered operators of zero and low-emission
vehicles also receive a $100 annual registration discount.
• The South Australian Government had proposed a road user charge for electric vehicles, which waswithdrawn in 2022 following a change in government.
• New South Wales will introduce a road user payment for eligible EVs from July 2027 or earlier if electricvehicle (EV) sales reach 30% of new vehicle sales. The payment will be equivalent in real terms to 2.61
cents per km for battery or hydrogen cell EVs, and 2.088 cents per km for plug-in hybrid EVs.
The Australian government and other parties have claimed that the form of these EV road-user prices makethem equivalent to excise taxes, which, under the Constitution, only the Australian Government can collect.
In October 2022, the Australian Government filed an intervening submission with the High Court case of
Vanderstock & Anor v. The State of Victoria, arguing that:
The Zero and Low Emission Vehicle Distance-based Charge Act 2021 (Vic) (ZLEV Charge Act)
imposes a tax on goods: specifically, on zero and low emission vehicles (ZLEVs). The tax (ZLEV
charge) is calculated by reference to the quantity of the consumer’s usage of a ZLEV. It imposes
an excise, and is therefore invalid. (paragraph 6)57

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

The focus of this section is on the economics of road-user charging and should not be read as a comment on
the constitutional legality of current road user charges. Nevertheless, if the High Court decision makes it
impossible for states to unilaterally collect set per kilometre charges, then the Australian Government will need
to be a party to any trials by state and territory governments of road user charging for any vehicle, regardless of
their fuel type. Ultimately, some degree of cooperation across the federation will be needed given the Australian
government’s primary role in funding the National Highway and interstate travel on ordinary roads.
The next steps toward the implementation of road-user charges will involve challenges in policy design(discussed below), including how charges might limit road congestion and road damage, meet distributional
objectives and raise revenue.

Per kilometre charging?
Putting aside congestion charges, the dominant suggested model for road pricing is a fixed charge perkilometre travelled regardless of where that travel occurs in a city. This is a simple system with many
practical benefits — it is easy to explain to consumers, is readily accommodated by annual odometerreadings and could be implemented relatively rapidly once public acceptance increases. The fairness issues
that would arise were EVs to be exempt from making any contribution to their road use and the fact that the
only immediate option for recovering costs from them would be distance-based charging suggests that roaduser charges will become normalised for all road users. There would be a need for some offsetting reduction
in existing fuel excise, though some additional charge could potentially be levied relating to environmental
impacts of emissions that are not being addressed in other ways (such as a carbon pricing mechanism).
However, there are disadvantages from simple distance-based user charges, particularly their efficiency as a
pricing mechanism.
Efficient pricing would set charges as close as possible to the marginal (or incremental) costs of a journey.
For non-congested roads, the incremental costs of road use are close to zero for light vehicles, so imposing
a charge will inefficiently reduce valuable journeys.35 (Of course, the same problem also occurs for fuelexcise since its costs relate to overall use, not to the marginal costs.) In contrast, for congested roads orwhere vehicles cause road damage, efficient prices will often need to be high (see below).
An issue confronting policymakers is that pricing that only related to marginal costs would recover only aportion of the revenue needed for road construction and maintenance, which would have to come from othersources. Municipal rates would be one option for road funding within Australia’s biggest cities as it is arelatively efficient tax and reflects that most households benefit from road access.
However, were that option to be rejected, distance-based charges could provide a second-best revenue source(with additional charges imposed for congested routes and vehicles that damage roads). The degree of
inefficiency of distance-based charging as a source of revenue depends on the responsiveness of distancetravelled to road user charges. Since excise taxes act as a crude form of distance-based charging, theextensive literature that shows that fuel price increases have small effects on road use suggests that motorists
are also likely to be relatively insensitive to at least modest distance-based fees. Accordingly, distance-based
charges may be more efficient than general revenue for funding the fixed costs of maintenance and road
construction. Experimentation with distance-based pricing, starting at modest prices akin to the Victorian model
described above and raising them slowly, would be a way of assessing demand responses and the efficiency of

35 Some other costs are associated with distance travelled — such as noise, tyre particulates, emissions, and accidents. In

most instances, road user charging is not the most targeted or efficient policy approach to these problems, though an incidental
impact of some forms of user charging will be to reduce them (Croci 2016; Gibson and Carnovale 2015; Singichetti et al. 2021).

58

A better environment for productive investmentcollecting revenue this way. Emerging evidence from cities that have introduced some form of user charging,
like Stockholm, London and Milan, also provides some lessons (Croci 2016).
It is inconceivable that distance-based charges could go far in recovering costs in less busy regional and ruralroads. In that context, governments will have to continue their role of providing funding through other means.
A supplementary approach to distance-based prices would be the addition of a fixed charge to contribute to
the fixed costs of road construction and use. Existing vehicle registration, insurance costs and licencecharges are already in this form and were about 80% of the revenue collected through net excise taxes in
2020-21 (BITRE 2022). That charge may not be at the optimal level, which should take into account theeffects on vehicle ownership. Governments could also give consideration as to whether compulsory third
party insurance should be folded into distance-based charges as risks relate to distance (Litman 2011). In
the interim, maintaining fixed charges roughly in line with existing fixed charges may be a prudent approach,but with longer-run charges taking into account their impacts on vehicle ownership. This may increase or
decrease the share of road costs recovered through fixed charges.
One option that could be considered is a menu option for motorists, who could choose a lower fixed cost anda higher distance-based charge. For road users that value car use, but mostly for shorter trips, this would be
more efficient than a high fixed charge that discouraged them from vehicle ownership at all. This may beparticularly attractive for elderly people for whom vehicle ownership provides considerable autonomy.

How road user charges could help to address congestion
While congestion has long been a concern for governments (figure 2.8), recent trends suggest thatcongestion costs will be increasingly important.
• The rise of working-from-home arrangements during and after the pandemic has led to changes in urban
travel patterns (PC 2021h). To some extent, this has the potential to reduce congestion on routes
previously used by commuters. However, more recent data suggests that COVID-19 strengthened
preferences for car travel over other modes; and congestion in many cases returned (or exceeded)
pre-COVID levels, including in suburban routes.
• Given that Australia’s borders have reopened following the lifting of the restrictions associated with the
COVID-19 pandemic, net overseas migration has shown signs of rebounding. This will increase city
growth, and depending on additional infrastructure spending, will aggravate congestion.
Charges during peak times or on heavily congested routes reduces urban congestion (PC 2017a, 2021c) bylimiting trip numbers or diverting travel to other times or other transport modes that have fewer impacts, suchas walking and public transport. It could also raise additional funds for the maintenance of roads with highusage and signal the need for more capacity. There are varying forms of congestion charges, including:• central business district ‘cordon’ charges, which suits cities where congestion is mainly caused by
predictable commuter traffic into a central area (as used in London and Singapore)• corridor charges, where drivers are charged based on how far they travel along congested arterial roads
and freeways in the peak direction.
Aside from road user pricing, there are several levers that can be used to address congestion, although theyvary in their efficiency. For instance, subsidies to public transport can make mass transit more attractive as
an alternative to car use. However, without proper calculation of social marginal cost (and theimplementation of effective concessions systems) such subsidies tend to be regressive and costly(PC 2021c). Well-designed parking levies, on the other hand, could be more efficient — a 10% increase inparking charges reduces car use by between about 2 and 13 times more than the reduction achieved by a59

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

10% decrease in public transport prices. In either case, road-user charging would be more effective in
directly targeting roads and routes that experience avoidable congestion.
At this stage, there has been limited use of road user charging to reduce congestion. For instance, motorists
using Sydney Harbour Bridge face a peak charge (implemented as an addition to the existing toll). A key
step would be expanding the use of congestion charges, taking account of the need to avoid diversion of
traffic from trunk roads to other roads — which could merely shift congestion. Since it would be difficult toimplement congestion charges any time soon across a whole city, planning and modelling will need to informthe roads subject to it, and the optimal period and level of charges will require some experimentation.
Figure 2.8 – Costs of congestion in Australian cities
a. Impacts of congestion on travel time, 201960

Trip duration penalty (%)

Trip duration penalty (%)

70
Sydney

60
50
40
30
20
Perth
10

Melbourne
50
40
30
20
Brisbane
10

Adelaide

0

5am
6am
7am
8am
9am
10am
11am
12pm
1pm
2pm
3pm
4pm
5pm
6pm
7pm
8pm

5am
6am
7am
8am
9am
10am
11am
12pm
1pm
2pm
3pm
4pm
5pm
6pm
7pm
8pm

0

b. Avoidable social costs of congestion (per capita), 2019-20 (2018-19 prices)1600$1,476$1,403$1,180Costs per person ($)

1200$1,101
$862

800
$565
$462
$331

400

0
SydneySource: PC (2021c).

60

Brisbane

PerthMelbourne

Adelaide

Canberra

HobartDarwinA better environment for productive investment

Heavy vehicles
As noted above, existing registration fees excise for heavy vehicles already have explicit links to road use.
However, there are sound rationales for also moving to distance-based charging, taking into account damage
to roads and any other external impacts that their use entails. A small-scale trial indicated that the systems andtechnology to achieve heavy vehicle distance-based charging is feasible and demonstrated that some trucks
would pay less under that model (DITRDC 2020). Further, large-scale trials are underway (DITRDC 2022).

Other models of pricing
Starting simple is the clear policy imperative. In the shorter-term, a viable road funding model could comprise:• a flat distance-based charge plus a fixed charge (such as registration), as these are relatively efficient
ways of raising revenue to help recover construction and maintenance costs• supplementary surcharges to cover the marginal costs of road use associated with congestion and heavy
vehicle road damage, which would also contribute to road funding• general revenue to meet the community service obligation to fund roads in regional and remote areas,
reflecting that the above mechanisms could only realistically fund a small fraction of total costs.
However, over the longer run, distance-based charges could vary depending on the nature of the road (suchas its road surface quality and vulnerability to damage) and its location. In principle, more cost recovery
could occur on road segments or at times that demand was very unresponsive to pricing.

Distributional issues
Road user charging has some distributional consequences, though these would not be great weredistance-based charges to be close to the charges that are implicit in fuel excise. Indeed, given EVs andhybrid vehicles are largely purchased by those on higher-incomes (Mitchell and Monterosso 2021), the effectof standard distance-based charges may be progressive compared with current road funding models.
The distributional consequences of any congestion charge are unclear and will depend on empirical evidence
from overseas and experimentation. In Cardiff in Wales (UK), congestion charges had a regressive impact,
though better public transport provision could offset that (Santos and Caranzo 2022). That option aside, it may
be possible to have concessional congestion charges or other approaches for given travellers. For example, inLondon, reimbursements for congestion charges are available to charity workers, aged care workers, andvolunteers, while discounts are available to and people with a disability (Transport for London 2023).

Road funds
The Commission has already spelt out how road funds could better connect revenue collected from motorists
to investments — a key missing element in current arrangements, which rely on planning and politics(PC 2017d, pp. 132–142). The main element of this approach is hypothecation of road-related revenue into
funds dedicated to construction and maintenance of roads, with investment decisions guided by revealed
preferences by motorists about the infrastructure they value most. This more market-based approach toinvestment is less likely to lead to poorly-based investment decisions.
Any such road funds should commence with trials to build consumer and political confidence that they willachieve their intended benefits.

61

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Recommendation 3.5
The next steps toward road user charging

Australian governments should work towards an intergovernmental agreement on road user charging for
all vehicle types, focusing on distance-priced charging including any road damage premiums, andsubsequently, incorporating congestion charges for crowded roads. The agreement should set out theroles of the different level of governments, how road funds and trials should be implemented, and theappropriate transition pathway away from fuel excise.
In developing a new pricing regime, Governments should consider the inclusion of compulsory third party
insurance costs in distance-based charges and menu options for motorists to choose between higher
distance-based charges and lower fixed charges.
The appropriate level of distance-based and fixed road charges, and the desirable extent of exemptions
and concessions, should be based on trials and the experiences of overseas jurisdictions that havealready employed them.
Ultimately, governments should work towards the longer-term objective of more efficient pricing of roaduse, including through the use of congestion charging in urban centres.

Public transport infrastructure and service provision
Public transport involves public funding of service operation, of capital goods (such as trains and buses), andof public infrastructure (such as additional bus lanes and rail networks). As the Commission (2021c) has
outlined previously, it is neither likely nor desirable for fare revenue to recover the full costs of public
transport and infrastructure. This reflects that public transport is a human service that aims to provide
affordable transport for most Australians. Moreover, the average price required to recover the very high fixed
costs of transport network would be well in excess of the incremental cost of a trip, leading to inefficiently low
levels of demand. The adverse demand effects of average cost pricing would make it difficult to have aviable public transport system. Moreover, fare settings should also recognise the positive social benefits ofpublic transport — such as reduced road congestion, environmental benefits, and mobility for people who
might not be able to access private transport.
Setting fares with reference to social marginal cost (as opposed to average cost) focuses on efficient use
and provision at the margin. Managing the usage of public transport can have significant implications forinvestment in network capacity, as noted by Infrastructure Victoria (2020, p. 8):… an overused network with crowded train carriages should be priced higher to reduce over crowding
and help fund new infrastructure to be installed to allow for more trips (i.e. the social cost of adding
extra trips is high), while an underused network with empty trains should be priced low to encourage
greater use of the existing network (i.e. the social cost of adding extra trips is very low).
While cost-benefit analysis serves an important role in assessing whether large investments are likely to beeconomically justifiable, setting fares according to social marginal cost is an important complementarymeasure — not only to avoid inefficient expansion (or under-investment) in public transport networks, but toensure that public transport provides social and economic benefits. Such pricing takes into account the modeof travel (for example, trains, ferries, trams or buses), distance, and time of use, among other factors.
For the most part, public transport fares are not set in accordance with the calculation of social marginal cost.
Rather, they are typically based on historical settings, with very low rates of cost recovery (including for thoseon higher incomes travelling at peak times). Increases are often avoided for political economy reasons, andoverall fares have remained stagnant in real terms (figure 2.9). Many jurisdictions have offered some62

A better environment for productive investment

services for no charge, when better outcomes for passengers would be achieved by using these forgone
funds to improve the quality of public transport services.
More sophisticated approaches to setting fares and subsidies could more better address both equity or
efficiency goals. One such approach to pricing developed by the Independent Pricing and Regulatory
Tribunal has been operational in New South Wales for some years (PC 2021c, p. 18), while Infrastructure
Victoria has undertaken considerable research on pricing reforms (Infrastructure Victoria, sub. 10, p. 1),though this is not yet reflected in policy.
Figure 2.9 – Fares have remained stagnant in real terms
Public transport price indexes, 2000–2021

200

SydneyBrisbaneIndex (2000=100)

180

Melbourne
Adelaide

200

160

140

140

120

120

100

100

80

80

2004

2008

2012

2016

2020

HobartCanberra

180

160

60
2000

Perth
Darwin

60
2000

2004

2008

2012

2016

2020

Source: PC (2021c).

No other jurisdictions have moved to more sophisticated approaches, but others could copy the essential
elements of pricing that IPART has developed. Moreover, jurisdictions could improve institutionalarrangements for public transport fare setting by:• publishing a long-term strategy for fare setting with explicit rationales for fare decisions• retaining real fares by increasing fares annually by at least the Consumer Price Index (if notalready customary) and, probably more desirably, growth in public transport costs• publishing the expected impacts of fare reforms, including any distributional results• holding open consultations with stakeholders• periodically instituting holistic reviews. (PC 2021c, p. 18)

Recommendation 3.6
More efficient public transport fare settings

Public transport fares across all states and territories should apply the pricing framework used by the
NSW Independent Pricing and Regulatory Tribunal, including consideration of fares that take into accountpeak-time crowding, reduced road congestion, distance-based charges and fares that reflect the lower
costs of buses compared with trains.
States and territory governments without independent bodies to make jurisdiction-specificrecommendations should improve fare setting through other channels, such as publishing pricing
strategies and rationales for decisions, and increasing fares annually by growth in public transport costs.

63

Openness to trade and foreign investment

3.

Openness to trade and foreign
investment

Key points
International trade and investment will be critical for driving future productivity growth and building
economic resilience.
• Trade in goods and services and foreign direct investment (FDI) are key sources of competitive pressure fordomestic firms and important mechanisms for facilitating the diffusion of knowledge and innovation. The
benefits of openness in shaping Australia’s economy have been evident over many decades.
• Supply chain shocks and global upheaval do not diminish the case for openness. Indeed, as a small
advanced economy, increased global linkages are likely to be the best way for Australia to build resilience todeal with global uncertainties.
Australia’s FDI screening regime should properly account for national security concerns, but careshould be taken not to disincentivise investment.
• Application fees for foreign investors are increasingly being used as a tax base. There are limits to whichsuch taxes can be used without affecting the supply of FDI into Australia.
Removing residual tariffs would reduce costs to importing firms and consumers and assist moreadvanced production processes that form part of global supply chains.
• Australia’s tariff regime provides little protection to domestic firms. Tariff revenue is likely already outweighed
by compliance costs to importing business, and this will increasingly be the case as preferential trade
agreements proliferate.
Trade in services is likely to be increasingly significant for the advancement of productivity.
• Growth of trade in services stems from the advancement and proliferation of technology, as well as risingincomes among Australia’s trading partners. Barriers exist both ‘at the border’ and ‘behind the border’.
• There are multiple policy and regulatory levers that would help Australia participate in the global growth intrade in services, including improvements to migration and FDI policy settings, and licensing regulations.

65

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

3.1

Introduction

Australia’s openness to trade and foreign direct investment has increased over several decades and has
been a major force in shaping the economy (box 3.1). This process has been associated with sustained
contributions to living standards, predominantly through their role in promoting competition and resource
efficiency, innovation diffusion and, thereby, productivity growth.
As a small, open, advanced economy, trade and foreign investment will continue to shape Australia’s exposure
to competition and innovation. Both will influence the structure of Australia’s economy. The state of global tradeand investment will be an overarching determinant of productivity growth in both the short and long term.
While there are a great number of exogenous, international factors that are beyond the scope of Australia’s
decision-making, the Australian Government has relatively direct levers to determine the settings for trade andinvestment. How these levers are deployed in four key policy areas will have direct implications for productivity:• Australia’s overall approach to global trade and investment. Heightened global uncertainty has led topressures for the Australian Government to intervene to bolster self-reliance. But decisions to intervene
would bring their own risks and must be weighed carefully against the efficiency gains of openness — inpractice, direct interventions would rarely be justified (section 3.2).
• Regarding merchandise trade, more open settings (globally) would improve productivity by allowing
Australian exporters to access larger markets while decreasing the costs of imported inputs for domestic
industry (section 3.3).
• Foreign direct investment introduces both competition and innovation to Australian markets but can also
bring national security risks. Balancing the benefits and risks is challenging (section 3.4).
• As an advanced economy capable of delivering sophisticated services, the ability to trade services
globally will help to shape Australia’s productivity in the longer term. In the decade prior to the COVID-19
pandemic, Australia had only begun to participate in increasing global trade in services, often facilitated bydigital technologies. Policymakers will need to be attuned to the impact of trade and investment settings,
and ‘behind the border’ measures on Australia’s services trade prospects (section 3.5).

Box 3.1 – Trade and foreign investment have shaped Australia’s economy
Trade and foreign investment have been key drivers of the structural shifts in Australia’s economy over
several decades, which have allowed production to specialise in areas of comparative advantage,
bringing substantial national income gains.
• Trade policy settings underwent significant reforms across the second half of the 20th century,
resulting in a dramatically more open economy. While significant tariff reductions were implemented in1947 (reducing tariffs to a rate of 30%) and 1973 (reducing most tariffs by 25%), the successive
reforms between 1986 and 2010 brought tariffs to their current, historically low levels (below 5% on
average). The effective rates of assistance to manufacturing and agriculture sectors declined
accordingly over the long term (figure below, panel d).
• Similarly, Australia’s foreign investment policy settings have been significantly reformed since the1980s, increasing the role of FDI in Australia. Australia receives more foreign investment than it sends
out, and in the past decade in particular, the growth of foreign investment has helped make up for
declining levels of domestic investment. In the past 20 years, FDI has favoured mining, agriculture,and property (figure below, panel a).

66

Openness to trade and foreign investment

Box 3.1 – Trade and foreign investment have shaped Australia’s economy• As Australia opened up to international competition and investment, this helped drive structuralchange in the industrial composition of the economy (figure below, panels b and c). Since the early
1980s, Australia’s exports have been dominated by mining, as the share of agricultural andmanufactured exports declined.
Australia is also party to a number of regional and bilateral trade agreements, which largely proliferated
well after the major waves of unilateral tariff reductions. Australia has 17 such agreements in force, 11 ofwhich were implemented in the past decade (DFAT 2022a). Australia has signed bilateral agreementswith all of its major trading partners — about 90% of Australia’s imports will be covered by preferences
once agreements with the United Kingdom, European Union, and India are implemented (PC 2022d).
Global trade has also expanded over the long term, as production and supply chains have become moreinterdependent. Today, international trade is increasingly characterised by global value chains that are
geared towards the production of components that are on-sold to other countries for further value-adding
or processing. This has resulted in significant efficiency gains to producers both globally and in Australia.
Openness has been an integral part of Australia’s development into an advanced service-driven
economy, and indeed has become Australia’s default setting. 36 Some of the benefits of open trade andinvestment have accrued over many years, as resources have shifted between sectors (i.e. away frommanufacturing and towards services) and within sectors (e.g. towards more efficient areas of agriculture
and higher-value manufactures).

60

60

50

50

40

40

30

30

20

20

10

10

0

% of GDP% of GDPa. Foreign direct investment has increased particularly in some industries

0
2001

2006
Agriculture, forestry, and fishing
Manufacturing
Wholesale and retail trade
Finance and insurance
Other

2011

2016

2021

MiningElectricity, gas, and waterTransport and Communication
Property and business services
Total

36 For example, there is evidence to suggest that the productivity growth experienced by Australia in the 1990s can belinked with the preceding microeconomic reforms, including significant trade liberalisation (Parham 2004; PC 1999).

67

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportBox 3.1 – Trade and foreign investment have shaped Australia’s economy
b. Composition of exports (share of total)c. Composition of imports (share of total)

7030Resources
Agriculture

60

Industrial Supplies
Services

25

50

20

Capital
Goods

40
15

Consumer Goods

30
Services20
10

5Manufactures

0
1960

Other

1970

10

Transport
equipment

Fuels &
Lubricants

0

1980

1990

2000

2010

2020

1980

1990

2000

2010

2020

d. Effective rates of assistance have declined over several decades
40
35
ERA (per cent)

30

Manufacturing

25
20
15
10
5

Agriculture01970-71

1990-91

2010-112020-21

Source: PC (2022f, 2022b).

3.2

Building trade resilience

The integrated nature of the world economy has implications for how risk and uncertainty are spread.
Disruption to production in one country affects others in the global supply chain. Breakdowns in trade
between two countries can have various implications for trading partners. Trade itself can spread someforms of disruption, particularly where it relates to biohazards or disease.
At the same time, global trade has changed the way risks are managed. For instance, trade is a way ofdiversifying risk, such as where imported goods can make up for sudden shortfalls in domestic supply.
International cooperation and trade can help the development and diffusion of scientific responses tobiohazards or disease.

68Openness to trade and foreign investment

The double-edged nature of more open trade has been highlighted by the emergence of new sources of
uncertainty in the past five years, including trade tensions, geopolitical events, and a worldwide pandemic —all of which are continuing to some degree (box 3.2). As a result, questions have arisen about the future of
global trade, both for Australia and internationally.

Box 3.2 – Major sources of trade uncertainty in the past five years
The impact of COVID-19 on trade
The first two years of the COVID-19 pandemic led to widespread interruptions to economic activity.
Despite recessions occurring in many countries, the negative effect on merchandise trade was relatively
muted. Australian imports of consumer goods, for instance, quickly rose beyond pre-COVID levels.
Between late 2019 and early 2022, Australian households maintained relatively stable consumption of
essential goods, even increasing their consumption of discretionary goods (due to increased time athome and the lack of available services such as travel) (ABS 2022a).
Protectionism and trade disputes
While protectionist sentiment arises from time to time in many countries, one of the more globallysignificant episodes occurred between 2017 and 2021. Trade policy settings were in flux between theworld’s two largest economies — the United States and China.
Australia and China have also experienced flux in trade policy settings, with China implementing a seriesof trade measures in 2020 specific to Australian exports (PC 2021g), including:• anti-dumping tariff of 73.6% and countervailing duty of 6.9% on barley; and a tariff of up to 212% andcountervailing duty of up to 6.4% on Australian wine
• suspension of imports from four Australian abattoirs due to mislabelling of products and healthcertificate requirements; suspension of relations with Australia’s largest grain exporter, CBH, andanother grain handler, Emerald Grain due to claims of weed seeds in a consignment• preventing ships from unloading their cargoes citing quality reasons. Customs delayed quarantine
inspection causing live lobsters to die at airports• progressively suspending timber imports first from Queensland, then from Victoria, South Australia
and Tasmania.
The incapacitation of the WTO Appellate Body has made it more difficult for dispute appeals to be heard
and resolved (PC 2022f, p. 61). As an interim measure, an alternate body has been established by asubset of WTO members (not including the United States).
Trade bans caused by domestic shortage
Export bans have also been implemented in countries in order to manage price increases caused as
domestic demand increases. Such bans are designed to protect domestic consumers from inflation, by
forcing domestic producers forego higher prices on the international market.
Recent examples include Malaysia’s ban on chicken exports (in response to supply shortages) andChina’s global ban of urea exports (in response to domestic demands for fertiliser) (Lin and Chu 2022).
The latter caused shortages in the diesel exhaust fluid AdBlue.

69

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportBox 3.2 – Major sources of trade uncertainty in the past five years
Geopolitical influences on trade
In early 2022, the onset of war in the Ukraine led to disrupted trade, particularly in food and energy(Ruta 2022). And while the energy shortages were felt most sharply in Europe, Australian fuel prices
were also affected. The combination of the invasion of Ukraine; a lack of supply boost from OPEC; andthe ‘post-COVID’ recovery in global demand for oil, resulted in retail fuel prices reaching their highest
levels since 2014 (ACCC 2022e).
Trade and the climate transition
Other potentially significant developments are still in train, such as the potential for carbon border tariffs
to be implemented in Europe and elsewhere. If the EU’s Cross Border Adjustment Mechanism (CBAM) is
implemented as currently proposed, it is likely to impact a relatively small number of Australian exporters(PC 2022f, p. 82). Greater costs could be levied on Australian exporters if similar carbon tariffs are
adopted by Australia’s main trading partners.

Global trade has been resilient to disruptions and vulnerabilities
At a high level, evidence suggests that global trade flows have not diminished despite heightened
uncertainty. Text-based indices of uncertainty show that the discussion of economic and trade uncertainty
spiked during the trade tensions between the United States and China in 2016, and at the onset of the
COVID-19 pandemic in 2020 (figure 3.1, panel a). In both cases, the resurgence of trade (both globally andfor Australia) is suggestive of its central role in how nations manage major disruptive events. Moreover, inpractice, the relationship between uncertainty and trade is not straightforward: the extreme uncertainty
brought on by the global pandemic was less damaging to trade than the trade tensions in 2017, particularly
for Australia (figure 3.1, panel b). This suggests that trade disputes — effectively, policy and regulatory risks— can provide the most significant shocks to trade itself.

70

Openness to trade and foreign investment

Figure 3.1 – Trade tensions and COVID-19 caused significant trade uncertainty
a. Measures of uncertainty based on text mining
Economic Policy Uncertainty Index (Aus)World Trade Uncertainty Index

200
180

350

160
300
140
250

120

200

100
80

150

60
100

40
50

0
1998

World Trade Uncertainty Index

Economic Policy Uncertainty Index

400

20
0
2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

b. Global trade in merchandise
600
500

Australia

Index

400

300

World

200
100
0

a. The World Uncertainty Index (WUI) and the World Trade Uncertainty Index (WTUI) are quarterly indices based on text
searches. They are based on frequency counts of the word ‘uncertainty’ and its variants (and for the WTUI, uncertainty inrelated to trade) in the quarterly Economist Intelligence Unit (EIU) country reports of 143 countries from 1996 onwards. b. The
Economic Policy Uncertainty Index for Australia is based on text archives for eight major Australian newspapers from January
1998 onwards, and is comprised of the number of articles containing the terms ‘uncertain’ or ‘uncertainty’, ‘economic’ or ‘economy’,and one or more policy-relevant terms: regulation, ‘Reserve Bank of Australia’, RBA, deficit, tax, taxation, taxes, parliament,
senate, ‘cash rate’, legislation, tariff, war.
Source: Ahir, H, N Bloom, and D Furceri (2018 Updated to Q2 2022); WTO (2022b).

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

In addition, recent evidence suggests that the nature of globalisation is changing, with a greater role forservices and intangibles. McKinsey (2022) note that:
Flows of services, international students, and intellectual property grew about twice as fast as goods
flows in 2010–19. Within services, flows of knowledge-intensive services — including professional
services, government services, IT services, and telecommunications — are growing the fastest.
Indeed, IT services and data flows peaked during the pandemic, enabling remote work and operation in lieu
of transport, and contributing further resilience to the global economy (McKinsey Global Institute 2022). This
would suggest that just as the global economy became more interconnected through more complex supply
chains, so too has global integration increased with technological progress and in response to
COVID-related disruptions.
At the same time, the experiences of recent years have highlighted potential vulnerabilities in Australia’s
supply chains and the importance of ‘economic resilience’. Several conceptualisations of resilience are
relevant to Australia’s productivity. The Commission has considered a ‘resilient supply chain’ as one that
continues to function when exposed to shocks and adapts to changes (PC 2021g, p. 36). Others similarly
define economic resilience as the capacity to ‘resist a particular shock and to recover rapidly to the previous
level of growth or better’ (Goetz, Fleming-Muñoz and Han 2016) or to ‘prevent and prepare for, cope withand recover from shocks’ (WTO 2021, p. 7).
In many cases, individual market participants have a comparative advantage in addressing supply shocks anddealing with resilience. Thus, when vulnerabilities in supply chains and markets often arise — and are resolved —without government intervention. For instance, ‘just in time’ production processes help firms minimise the costs
associated with inventory, but can increase vulnerability to supply interruptions (PC 2021g; Stiglitz 2022). If
multiple competing firms operate with similar processes, this raises the level of vulnerability at an industry level. As
firms manage risks in their own self-interest, including through changes to sourcing, inventory, and production
processes, this reduces vulnerability. The policy questions are: whether market failures exist in the provision ofresilience; the source and characteristics of such market failures; the extent to which policy can directly address
those failures; and whether the benefits of intervention exceed the costs.
Even where such vulnerabilities do not relate to critical or essential goods, they can be relevant toproductivity levels — particularly of the market sector. This raises questions regarding the role forgovernment: namely, should government help avoid vulnerabilities altogether through trade policy; and towhat extent should governments intervene in how vulnerabilities are managed.
This section considers the economic costs and benefits of different policy approaches. Notwithstanding thevital importance of rigorous analysis and evaluation of strategic concerns relating to geopolitical issues andnational security, this section does not include an analysis of those issues.

72

Openness to trade and foreign investment

An era of trade resilience
Calls for ‘onshoring’ are a common response to global shocks. It is a truism that reliance on domestic
production might avoid the risks associated with trade. However, it would involve its own risks, as well as
forgoing the significant and ongoing mutual gains from trade. As discussed above, this not only affects thevariety and costs of products and inputs, but also has implications for specialisation throughout the economy.
Indeed, global trade can help build resilience to domestic events that might otherwise disrupt the economy.
While an absolute retreat from globalisation is unlikely, in recent years countries have increasingly been
deliberately shaping their trade flows and implementing new forms of protection. For instance, the UnitedStates’ ‘friend-shoring’ approach to strengthening supply chains will involve ‘partnering with allies’ (New
Zealand Foreign Affairs and Trade 2022) — effectively biasing trade in favour of nations sharing geopolitical
ties. The US Treasury Secretary noted that:
Working with allies and partners through ‘friend-shoring’ is an important element of strengthening
economic resilience while sustaining the dynamism and productivity growth that comes with economic
integration. Friend-shoring is about deepening relationships and diversifying our supply chains with agreater number of trusted trading partners to lower risks for our economy and theirs. (Yellen 2022)
Governments could implement a range of restrictions or incentives to influence firms’ choices of foreign
suppliers, and while this still realises some gains from trade, its distortionary effect is a risk to productivity
both in Australia and globally. To the extent that businesses are incentivised (or forced) to purchase goods at
higher cost or lower quality than would have otherwise been the case, this would effectively re-shape supply
chains to favour less efficient firms. The implications for productivity would increase, the more broadly suchactions were applied.
If Australia were to make such shifts in trade patterns, the economic implications would be shaped byAustralia’s economic relationships (across multiple dimensions) and place in the global economy. For
instance, trade patterns are determined, in large part, by geographic proximity. About 65% of Australia’s
two-way trade was within Asia37 — among relatively large economies with rising incomes (figure 3.2).
Influencing markets to shift trade away from the region would likely entail substantial efficiency losses, manyof which would ultimately be borne by Australian households in the form of higher prices and lower real
wages, lower product quality and reduced product variety.
Australia’s trade and foreign investment are also dominated by some of the world’s largest economies, withthose relationships also extending to migration (often as an export of tourism or education services)(figure 3.2). As such, strategic decisions with regard to the relationship between Australia and one of its
trading partners, say in regard to the trade in goods, would likely have broader implications.

37 Based on data from DFAT (2021c).

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Figure 3.2 – Top ten source countries for trade, investment and temporary skilled migration
Percentage share of total inflows to Australiac. Temporary skilled migrationa

a. Two-way trade

b. Foreign investment

Malaysia

CanadaSri Lanka

Germany

Netherlands

South Korea

India

China

US

New Zealand

Luxembourg

Malaysia

Singapore

Singapore

South Africa

UK

Hong Kong(SAR of China)

China

South Korea

Japan

IrelandJapan

Belgium

Philippines

US

UK

UK

China

US

India

0

20
%

40

0

10

20
%

30

0

10

20

30

%

a. Primary applicants granted.
Source: DFAT (2021c, 2021b); DOHA (2022).

Intervention in critical supply chains may be warranted in isolated circumstances
The Commission’s report on Vulnerable Supply Chains developed a framework that allowed specific policy
focus on ‘critical’ and ‘essential’ goods, as well as ‘vulnerable’ supply chains (PC 2021g). The Commission
stressed that managing risks of supply chain disruptions ‘inescapably entails costs on businesses,
consumers and governments’ (p. 1). As a fundamental principle, the Commission concluded that risks are
best managed by those with both the incentives and capacity to mitigate them. In most cases, private firms
are primarily responsible for managing risks in their supply chain, and governments need to consider the
potential for interventions to ‘crowd out’ efficient private sector risk management.
Government intervention may be justified in isolated cases. This may include instances when private risk
management is impeded (including by taxation or regulation) or where the residual risk resulting from market
decisions is out of step with public benefit. Some ongoing functions of government are critical to risk
management, such as ensuring regulations allow firms adjust to major disruptions, and the promotion of arules-based international trading system.
The policy response to a disruption will depend on specific circumstances — as exemplified by the recent
shortages of urea for diesel fuel additives (box 3.3). Several actions have improved Australia’s access todiesel fuel additives, building a more resilient supply chain without moving entirely to domestic supply, nor tocease importing from particular suppliers. Neither was it necessary to adjust regulations relating to the use ofdiesel additives, which aim to promote environmental policy objectives.
The urea shortages also highlight that it will not be possible for governments to predict every vulnerability
ahead of time. While the Commission (2021g) has provided a useful framework for identifying vulnerable
74

Openness to trade and foreign investment

supply chains, its empirical analysis did not identify the potential issues regarding urea (owing in part toinevitable data limitations). Moreover, it will not be possible to predict every global disruption, nor stockpile
for every shortage. As such, the ‘response phase’ will remain critical for policy.

Box 3.3 – A limited and pragmatic approach for diesel fuel additives
The costs associated with managing supply chain vulnerabilities – to businesses, governments, andconsumers – depends on the choice of strategy. These include:… stockpiling, diversification of suppliers or markets, contingent contracting, developing
domestic capability, or tolerating the residual risk, among others. They also depend on thestate of preparedness of firms and governments. (PC 2021g, p. 1)
In late 2021, China’s ban of urea exports led to shortages of the diesel fuel additive AdBlue, required foruse of diesel fuels by Australian regulations. While this occurred after the publication of theCommission’s report on Vulnerable Supply Chains, the framework of that report is useful inunderstanding the causes, adjustments, and alternate responses to the disruption.
Preparation, response, and recovery
Different risks are better treated in different stages. While a predictable risk might best be treated in theprevention stage, a highly uncertain risk might be better treated through response and recovery.
There appeared to be relatively little preparedness among businesses or government for a urea
shortage, despite the critical nature of AdBlue and the highly concentrated import market for urea.
Diversification of supply
Australia continues to import the vast majority of its urea supply. At the time of the trade ban, China was
the source of a significant proportion of the global urea supply and of Australian urea imports. At theheight of the shortage, supply was increased from Indonesian exporters. Australia continues to importurea from China among other sources.
Domestic supply and stockpiling
The Australian Government provided a temporary subsidy to domestic firms to restart their production of
urea in order to supplement imported supplies. No government stockpiling was undertaken.
Regulatory levers
The ACCC made a ruling to allow domestic producers of AdBlue to share information and collaborate toobtain adequate supply of refined urea, in the context of shortages.
An additional regulatory lever would have involved the relaxation of requirements to use diesel fueladditives in order to reduce particulate pollution. This lever was not used, possibly due to technicalcomplications and warranty issues it could cause for some diesel engines.

A key form of preparedness for governments will be to have processes and principles in place to guide policy
responses. To this end, the recent establishment of the Office of Supply Chain Resilience will play a key rolein informing government decision-making, as a source of expertise and due to its standing capabilities inmonitoring. Ideally, this should involve the provision of information on the cost of measures, the likelihood of
the vulnerabilities occurring, the magnitude and duration of the effects and mitigating strategies that do not755-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportinvolve domestic supply. This process would benefit from ongoing development of rigorous methodologies
for estimating the impacts of both vulnerabilities and interventions.
In the rare cases that call for government intervention in the management of supply chains, the policy response
can take many forms. It is critical that the costs to public expenditure and to productivity are taken into account asthey can be material, particularly where such assistance continues over time. Potential costs include the costs oflobbying for particular supports and their continuation, which could relieve firms from undertaking their own risk
management. Any such intervention should be subject to transparent and independent review.

Building resilience through openness
A key part of building economic resilience relates to vulnerabilities in the supply of critical goods. However,even these aspects of resilience are promoted by well-functioning markets, which themselves are bolstered(however indirectly) by open trade policy settings.
First, several Australian industries have proven relatively resilient in the context of recent world events, owing
to their sophistication and adaptability. For example, the Port of Melbourne has noted that the freight andlogistics sector proved adaptable and agile in the context of ‘increased regulatory controls, supply
constraints, elevated demand, equipment shortages, changing distribution markets etc.’ (The Port ofMelbourne 2021, p. 1). Other businesses leveraged existing capital infrastructure to produce new goods orservices, including spirits distilleries pivoting to commercial production of hand sanitizer (Allen 2020). To theextent that resilience is the result of businesses’ access to capital or advanced management, these are likely
to be improved by exposure to foreign trade and investment.
Similarly, protection can reduce economic resilience. If a trade shock leads to shortage, domestic firms andconsumers will likely experience price increases — in addition to the costs associated with any tariffs. So
firms and consumers suffer the cumulative effect on prices.
Second, Australia experiences significant supply chain disruption from domestic events. Major weather
events affect agricultural yields in regional areas and other forms of production in urban areas. Goods thatare not exposed to trade (including some fresh food products) can quickly fall into shortage. Trade has
proven an effective way to reduce supply risks associated with domestic shocks.
Finally, to the extent that policy and regulatory risks are some of the main global risks to trade, it is importantthat Australia contribute to and promote more open trade. While under certain conditions regional or bilateral
trade agreements can (collectively) contribute to more open global trade, greater contributions would
materialise from Australia’s participation in multi-party trade agreements and promotion of the internationalrules-based trading system.

Finding 3.4
Open trade and investment are key to resilience

Relative openness with regard to trade and foreign investment policy are conducive to productivity growth.
Despite the presence of severe global economic uncertainty, Australia’s productivity growth is best servedby more exposure to trade competition, more access to foreign direct investment, and a well-functioning
rule-based system of global trade. Protectionism and industry assistance in the cause of ‘self-reliance’
would pose significant risks to productivity.

76Openness to trade and foreign investment

Recommendation 3.7
Pursue trade resilience through openness

The Australian Government should pursue economic resilience by harnessing open trade. Public
interventions in vulnerable and critical supply chains should be considered as a last resort, given the
incentives for and capacity of private businesses to manage supply chain risks. Calls for assistance invulnerable and critical supply chains should be subject to assessment of economy-wide net benefits by
the Office of Supply Chain Resilience, with some form of transparent, public reporting on the justification
and/or costs of any intervention.

3.3

Addressing barriers to trade in goods

Both tariff and non-tariff barriers to trade result in costs for exporters to Australia and for Australian importers.
The relevance to productivity is two-fold:• Domestic firms may be less-exposed to import competition, removing a source of pressure to innovate,
and leading to a misallocation of resources in the economy.
• The costs of imported inputs or capital goods can simply raise the costs of production for domestic
producers, which also leads to suboptimal resource allocation (which in turn has economy-wide
implications). Australia relies heavily on the import of vehicles, machinery, electrical equipment, and fuels(figure 3.3), both for final consumption and as business inputs.
Figure 3.3 – Many of Australia’s imports are productive inputs

HTISC Chapter

Value of imports by Harmonized Tariff Item Statistical Codes (HTISC)
VehiclesMachinery
Electrical equipment
Mineral fuels
Pharmaceutical products
Optical equipment
Precious stones
Plastics
Confidential items
Furniture
Iron & steel
Knitted clothingNon-knitted clothing
RubberOrganic chemicals
0

37.5
37.3
28.1
27.9
10.6
10.4
9.5
7.7
7.6
5.9
5.5
4.1
4.1
3.9
3.3
10

20
30
Value of imports (A$ billion)

40

50

Source: PC (2021g).

The costs of tariffs
Australia’s historically low tariff levels are the cause of much less distortion to economic activity than waspreviously the case. However, the remaining tariffs are now responsible for a negligible amount of revenue
and would offer relatively little protection to domestic producers. At face value, there is little difference
between the economic costs associated with a tariff set close to zero and one set to zero.

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

However, Australia’s system of tariffs, concessions, and preferences entails compliance costs. Businesses
expend resources (time and effort) to avoid paying tariffs. In its report on the Nuisance Cost of Tariffs, theCommission (2022d, p. 45) has estimated total compliance costs were estimated to be $0.7–2.2 billion in
2019-20 — in other words, for every $1 in revenue raised by tariffs, the Commission has estimated $0.60 to$1.55 is lost in economic activity. These costs arise mainly from businesses accessing preferences under
preferential trade agreements.
• In some cases, businesses will avoid the compliance costs of preferences altogether and simply pay thestatutory tariff. In such cases, the benefits of preferential trade agreements in reducing trade barriers is forgone.
• This can have uneven effects across industries and types of businesses. Smaller businesses will have fewer
resources to devote to accessing preferences. Businesses importing more diverse mix of products will havea more complex task of understanding multiple tariff lines, or of obtaining certificates of origin from multiple
suppliers. The combination of these factors are likely to affect, for example, importers of large shipments ofvehicle parts, which may comprise hundreds of different parts from different manufacturers.
Some compliance costs could also be reduced by making it easier for businesses to interface with the tariff
system — a process already underway via the Simplified Trading System (DFAT 2022b). However, thisprocess will not reduce all compliance costs. For instance, importers need to comply with the rules of origin(RoO) contained in trade agreements, which are imposed to prevent transhipment.38 But as Australia has
implemented trade agreements with almost all of its trading partners, this reduces the incentive fortranshipment and hence the need for strict RoO.
The costs associated with RoO can be pervasive, as they include costs of producers adapting their production
process to abide by RoO, while importers or exporters may need to obtain an authorised certificate of origin.39 To
the extent that RoO feature heavily in Australia’s future preferential trade agreements (PTAs), more businesses
would likely be subject to the associated compliance costs. On the other hand, if RoO were to be less stringent in
future agreements (so as not to be binding on typical production processes) or if they were omitted altogether, thiswould significantly reduce compliance costs associated with preferences.
The compliance costs of tariffs would be avoided altogether if preferences were abolished, although thiswould leave Australian importers paying non-preferential tariffs instead. Ultimately, reducing tariffs to zerowould be the most effective way to reduce the costs to Australian importing businesses and consumers.
It is often argued that non-zero tariffs have inherent value in the negotiation of trade agreements. Aside from
benefits to Australian importers, trade agreements remove barriers to Australian exporters operating inforeign markets. Australian firms may become more efficient when they can access overseas markets
without barriers. In competing on more level terms with foreign producers in larger markets, they can be
exposed to more intense competition and receive greater potential returns to innovation.

38 Transhipment refers to goods being shipped via an intermediate country to the destination country in order to benefit

from the PTA that the intermediate country has with the destination country.
39 For instance, under ChAFTA, goods meet the rules of origin requirements if they are: ‘wholly obtained’ or produced
from wholly obtained goods in China or Australia; or ‘wholly produced’ entirely in China or Australia, or both, frommaterials classified as ‘originating’ in either country under the ROO; or produced in China or Australia, or both, using
inputs from other countries, while meeting the Product Specific Rule (PSR) applicable to that good (DFAT 2020, p. 7).
Importers must prepare either a ChAFTA Certificate of Origin or a Declaration of Origin — the former must be issued byan authorised body in the country of origin, while the latter are only accepted for goods covered by an advance ruling andare completed by the exporter. Records must be kept for five years.
78Openness to trade and foreign investment

In some cases, trade agreements provide a trade advantage to Australian exporters compared with exporters inother countries (figure 3.4). For instance, when the Japan Australia Economic Partnership Agreement (JAEPA)
was implemented Australia gained a tariff advantage over its competitors (such as the United States, Canada and
New Zealand). However, these advantages were eroded as those competing countries signed agreements withJapan — at which point, JAEPA allowed Australian exporters to compete on equal terms with exporters fromthose countries (ABARES 2022, pp. 2–3). And while short-term tariff advantages benefit exporting firms, it is thelonger-term effect of competition on equal terms that is likely to be conducive to productivity growth.
Figure 3.4 – Preferential trade agreements have benefited Australian agricultural exporters
Average tariff levels in Australia’s FTA markets for Australia and other exporting countries
Wheat
20

Oranges
30

20
15

15

20
10
10

5

0

0

0

Australia
India

2010
2011
2012
2013
2014
2015
2016
2017
2018

5

BrazilUSA

Australia
USA

Chile
S Africa

2010
2011
2012
2013
2014
2015
2016
2017
2018

10

2010
2011
2012
2013
2014
2015
2016
2017
2018

Average Tariffs
(%)

Beef

Australia
RussiaEU
USA

Source: ABARES (2022).

In any case, the Commission has previously found that most gains from trade liberalisation are likely to arise
from domestic liberalisation (PC 2001, p. 5). This would suggest that unilateral tariff reform should be
pursued regardless of marginal effects on trade negotiations.
In addition, it is unclear to what extent tariffs are valued in trade negotiations. Indeed, the value of Australia’s
remaining tariffs is likely to reflect the size of the Australian market as a share of global trade and the low
rates of Australian tariffs (PC 2010b, pp. 214–216). Given the size of compliance costs associated with
Australia’s tariffs, and the range of issues that are the subject of trade negotiations aside from tariffs, it ishighly likely that the gains from domestic liberalisation of trade policy would outweigh the value of tariffs asleverage. Typically, governments do not attempt to estimate the opportunity cost of ‘holding back domestic
reform to maintain negotiating coin’ (PC 2020c, pp. 11–12).
Tariff reform has only become more relevant given the state of the global economy in 2022.
• In the context of global uncertainty, building resilience in Australian industries (and the economy more
broadly) would be bolstered by efforts to reduce the costs of imported inputs to production.
• Removing residual protection would improve the efficiency of resource allocation in the economy, which isincreasingly important in the context of full employment conditions.
• Unilaterally reducing tariffs would send a strong message internationally in promoting freer trade, which isincreasingly important where policy and regulatory risks are the main threats to trade.

Shifting focus to non-tariff barriers
Non-tariff barriers to trade include administrative procedures or trade rules that ‘unjustifiably restrict the flowof goods and services’ (DFAT 2018). Non-tariff barriers at the border include certification and biosecurity
requirements, pre-inspections, border and customs delays, product labelling, or packaging standards.
Barriers ‘behind the border’ include regulatory rules, price controls, local ownership or foreign work79

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

regulations, rules of origin, or data storage and privacy requirements. The main forms of non-tariff measures(NTMs) faced by Australian exporters are technical barriers to trade (TBT) and sanitary and phytosanitary
regulations (SPS), which account for the majority of NTMs faced by agriculture (ABARES 2022).
In the past 30 years, as global tariffs have declined, nations have become more and more likely to implement
NTMs (figure 3.5). Globally, about 40% of NTMs come from export certification, inspection and licensing. The
economic cost associated with non-tariff measures has been estimated as being more than double that oftariffs (UNESCAP 2019).
Australia imposes a relatively high number of technical barriers to trade compared with others in the
Asia-Pacific region (behind China, New Zealand, and South Korea), with the majority of NTMs imposed byAustralia being technical barriers to trade. Generally, it is not uncommon for more developed economies tohave more non-tariff measures, given their more developed legislative and regulatory frameworks(UNESCAP 2019). At the same time, Australia has been ranked the highest performer globally in its
implementation of trade facilitating measures (alongside New Zealand), which partly offset the non-tariffmeasures (including transparent processes and paperless trade) (UNESCAP 2022, p. 10).

Number of measures

Figure 3.5 – Global tariff and non-tariff measures in agriculturea
3500

35

3000

30

2500

25

2000

20

1500

15

1000

10

500

5

%

0

0
1996

2000

2005

Number of SPS notifications (LHS)

2010

2015

2020

Number of TBT notifications (LHS)

Average global agricultural tariff (RHS)

a. Technical barriers to trade (TBTs) relate to technical regulations, standards and conformity assessment procedures.
Sanitary and phytosanitary (SPS) measures relate to human, animal and plant health.
Source: ABARES (2022).

NTM costs can stem from legitimate processes relating to quarantine and licensing and, as such, are not easily
removed unilaterally or avoided through trade agreements. At the same time, some of the protectionist measures
imposed in 2020 were in the form of suspensions due to mislabelling, quarantine issues, and customs delays.
With regard to non-tariff barriers implemented within Australia, the Australian Government launched a
Non-Tariff Barrier Action Plan in 2018. The objectives of the plan were:• to make it easier for business to report trade barriers• to build the capability of frontline expertise to service Australian exporters• to increase transparency of the government’s actions to address non-tariff barriers (DFAT 2019, pp. 42–43).

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Openness to trade and foreign investment

While trade agreements help Australian exporters access foreign markets, their effect is limited with regard
to NTMs. If governments are to reduce the risk of undue non-tariff barriers, this will require management ofpolicy and regulatory risks through international cooperation on individual standards and general promotionof the rules-based system of trade.

Anti-dumping and countervailing measures
While Australia has reduced its use of tariffs over time, it remains a prolific user of anti-dumping measures(including countervailing measures), with the number of products subject to such measures increasing overthe past decade (figure 3.6). In 2021, there were 67 anti-dumping measures in force in Australia and 6 newinvestigations were initiated — well above the world median (20 in 2021) (PC 2022f).
Anti-dumping measures in Australia are triggered by Australian firms applying to the Anti-Dumping
Commission (ADC). The ADC can recommend the implementation of anti-dumping measures if:… material injury has been caused by dumped or subsidised imports. Material injury to Australianindustry can include:• loss of sales, profits, market share and productivity• negative impacts to prices, cash flow, inventories, and employment.
The injury must be greater than what normally occurs in the normal ebb and flow of business.
(Anti-Dumping Commission 2022)
Figure 3.6 – Australia’s anti-dumping measures have grown over the past decadeAnti-dumping measures, 1990–2021
80

Number of measures

70
60
50
40
30
20
10
0
1990

1995

2000

2005

2010

2015

2020

Australia - Anti Dumping trade barriers (in force)
Australia - Anti Dumping trade barriers (initiations)
World median - Anti Dumping trade barriers (in force)

Source: PC (2022f).

As such, it is effectively a means for industry to seek to avoid import price competition where it can bedeemed to result from the practice of ‘dumping’40 — typically where low import prices are themselves theresult of protection through domestic subsidies, or where imports are priced lower than in their country of
40 ‘Dumping’ refers to a situation where the price of a product when sold in the importing country is less than the price of that

product in the market of the exporting country, or below the cost of manufacture (Australian Government 2020; WTO 2022t).
81

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportorigin. This is a stronger form of regulation than is afforded to price competition between domestic firms(under the Competition and Consumer Act (2010) (Cth)) which usually allows goods and services to be soldbelow the cost price unless other circumstances apply.41
Purported benefits of anti-dumping
On some level, as countervailing measures are used to counteract export subsidies, they may present adisincentive to governments to implement subsidies. However, as a relatively small consumer in mostmarkets, Australia’s measures are likely to have minimal impact on decisions about subsidies — indeed,
there has been no evidence of such influence.
As such, the main effect of anti-dumping measures is to benefit relatively small number of domestic firms.
However, this too can be muted where measures apply to only one of many source countries, or indeed only
some producers within a country. A study of anti-dumping measures in the EU found that producers fromthird countries (not subject to the measures) gained significantly more market share than domestic producers(National Board of Trade 2014).
Arguments have also been put forward that it is important to retain an anti-dumping framework in order toretaliate against countries applying them on Australian exports. Assuming a tit-for-tat approach to tradeprotections, this suggests that Australia’s use of anti-dumping could easily spur retaliation (indeed it has
consistently been the basis of trade disputes with major trading partners (box 3.4)) even if a framework forsuch measures is retained.

Box 3.4 – Australia has faced several challenges to its measures
The WTO regulates how members respond to ‘dumping’ under the Anti-Dumping Agreement.
Anti-dumping measures are permitted when governments demonstrate that:• dumping is taking place• difference between the price of the import in the country of origin and the price of the same product inthe destination country• dumping is causing harm to domestic businesses or risks doing so.
Australia has lodged multiple disputes with the WTO regarding anti-dumping actions taken by trading
partners. However, Australia’s own measures have also been disputed. For example:• Australia began imposing anti-dumping measures on Indonesian importers of A4 copy paper in 2017(among others). These measures were successfully challenged at the WTO’s dispute settlement bodyin 2019. The ruling claimed the Anti-Dumping Commission had not made the required calculations inline with the appropriate methodology used to determine whether dumping had occurred.
• Australia is a respondent to one case that is currently before the WTO. In June 2021, China requested
a consultation with Australia regarding Australian anti dumping and countervailing measures oncertain products including wind towers, stainless steel sinks and railway wheels. A panel to hear thecase was established in February 2022 and composed in September 2022.
Source: PC (2021f, 2022f), WTO (2019, 2022a).

41 Guidance published by the ACCC states that it is ‘usually legal for businesses to sell products below the cost price’,noting that it could be illegal if ‘done in a way that substantially lessens competition’ (ACCC 2022d).
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Openness to trade and foreign investment

Potential economy-wide gains from exiting
Overall, given the implications for resource allocation, there is likely to be an economy-wide net costassociated with any system of anti-dumping measures (PC 2016a). While the scale of the cost to Australia isunclear, it would be determined by the size and scope of such measures. 42
Yet, such costs persist. While WTO rules stipulate that anti-dumping measures are to be implemented for a
set duration, the Anti-Dumping Commission has approved extensions in several instances. As such,anti-dumping measures represent an ongoing source of protection to relatively few firms and an ongoing
economy-wide net cost. Moreover, there is no exit plan: the protections carries no expectation that firms will
implement strategies to improve their competitiveness; nor has there been an indication from governmentthat such measures are part of a broader plan to facilitate structural adjustment.
Rather than phase out its anti-dumping measures, Australia has strengthened its system in the past decade(box 3.5). While the reduction of compliance burdens are typically beneficial for any administrative system,
making the anti-dumping system more user-friendly for industry encourages usage — and thereby, increases
the net cost to the economy.

Box 3.5 – Australia’s anti-dumping measures were tightened in the past decade
While the Australian system has aspects that seek to limit the protection afforded by anti-dumping
measures, changes in recent years have eroded these disciplines and made it easier for import-competing
industries to access measures, at increased levels of protection. For example:• the lesser duty rule is no longer applied in certain circumstances• a broader set of factors are taken into account in determining whether industry has experienced
material injury• rules allow a greater departure from market values in estimating normal values• the ADC introduced zeroing when calculating dumping margins over a period of time, which involves
disregarding any sales where the export price is higher than the normal value (which results in higher
average dumping margins)• anti-circumvention laws were adopted.
Source: PC (2016a)

It should be noted that in order to receive anti-dumping protection, firms need not prove that they would be
unprofitable in their absence — although this is generally assumed in arguments in favour of the system. To
the extent that protection is being afforded to otherwise profitable firms, at the expense of others in theAustralian economy, there would be a strong case to remove those protections immediately.
To the extent that protections are vital for the survival of domestic Australian producers, this raises two
issues: first, that such policies are a negative influence on business dynamism, which is important for
efficiency and productivity (as discussed in chapter 1); and second, that in transitioning away fromprotection, governments should consider the timing of reform and the potential need for complementarypolicies to facilitate structural adjustment.

42 The US International Trade Commission estimated that removing US anti-dumping and countervailing measures would

have delivered a welfare gain equivalent to 0.03% of GDP.
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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

In addition, new applications for anti-dumping protection should not be considered unless economy-wide costs
and benefits are taken into account — as is the case in the European Union, Canada, Brazil, China, and New
Zealand. While this could take the form of a formal public interest test (as recommended by PC (2010a)), it
could also be implemented via the Minister’s current discretion over anti-dumping measures.43

Accepting international standards
Australia is a signatory to the WTO Technical Barriers to Trade Agreement (TBT Agreement), which aims toprevent regulations, standards, testing and certification procedures from creating unnecessary obstacles totrade. The agreement ‘strongly encourages’ members to use international standards as the basis for theirregulations and standards (DFAT nd). From a productivity perspective, the challenge for Australia is tobalance the need for new and innovative imported products against consumer protections and public safety.
• The Australian Government regulates the first supply of certain goods through the use of standards andregisters.
– Therapeutic goods will generally need to be entered in the Australian Register of Therapeutic Goods
before they can be legal imported. The Therapeutic Goods Administration notes that their regulatory
approaches are aligned with international counterparts wherever possible.
– Vehicle standards are regulated through Australian Design Rules, which cover aspects of vehicle
safety, anti-theft, and emissions. Current Australian Government policy is to harmonise vehicle safety
standards with international regulations where possible, with consideration given to the adoption of theinternational regulations of the United Nations.
• More broadly, standards set by the non-government national agency, Standards Australia, cover a wide rangeof products. Standards Australia provides input into international standards (as Australia’s representative to the
ISO and other bodies) and has a policy of adopting international standards wherever possible. Approximately
one-third of current Australian standards are ‘fully or substantially aligned’ with international standards, while
one-third have no international equivalent (US Department of Commerce nd).
Despite the mutual benefit for countries that have aligned or agreed standards, this is not always easy toachieve in practice. For instance, in a recent Senate inquiry into trade between Australia and Pacific Island
Countries, Standards Australia noted that poor harmonisation of standards was stifling trade in both
directions (Joint Standing Committee on Foreign Affairs, Defence and Trade 2020). Generally, all countries
bear costs when trade is impeded, but the costs can be particularly significant for countries who risk losing
access to larger markets and more advanced technology — the latter will increasingly be relevant toproductivity as technologies progress.
Australian industry stakeholders have raised issues where differences between Australian and international
standards act as impediments to the use of less costly or more productive technologies. For example, theCommission’s (2020a) report into National Transport Regulatory Reform found that Australian Design Rules(ADRs) (among other regulations) had discouraged or delayed the use of new heavy vehicle technology that
could potentially improve productivity and safety (such as twin steer prime movers).
In 2021, the Australian Government sought comment on three potential changes to ADRs, relating to monitoring
devices to detect other road users; wider vehicles; and vehicles with more efficient axle configurations. They
noted that if implemented, some of the immediate benefits relevant to productivity include:

43 As outlined in the Australian Government response to the Productivity Commission’s (2010a) report, ‘the Minister

currently has an unfettered discretion not to impose measures’ (Australian Government 2011, p. 26).
84

Openness to trade and foreign investment… less need for manufacturers to re-design or modify vehicles available in other markets …
Further, the changes proposed in relation to vehicle axle configuration would help manufacturers
to supply vehicles that are more efficient and/or productive, including vehicles able to complete
the same freight task in fewer trips, which reduces both transport costs and exposure related
crash risks. (DITRDC 2021, p. 2)
With regard to the therapeutic goods, a review undertaken into medicines and medical devices regulation in2016 resulted in several recommendations being implemented by the Therapeutic Goods Administration(TGA), in part to reduce the time delay before imported medications reach the Australian market. These
include the new priority review pathway and provisional approval pathway, which are slated to shorten theprocesses by up to three months and two years respectively (Therapeutic Goods Administration 2020).
As previously recommended by the Commission, there would be value in accepting international standards
that apply to goods, wherever practicable. While such standards would continue to play a crucial role insafeguarding public safety and consumer protections, it may be possible to make better use of international
standards. In many cases, Australian consumers and businesses would generally be better served to theextent that standards adopted in other leading economies are ‘deemed to comply’ — a transparent review
would still be possible in cases where the Australian Government identified a significant safety risk relating toan international standard.

Recommendation 3.8
More open trade and greater recognition of international standards

The Australian Government should promote open and resilient trade in goods including by:• reducing Australia’s statutory import tariff levels to zero• progressively removing Australia’s anti-dumping and countervailing measures, and subjecting any new
measures to an economy-wide cost-benefit test.
• increasingly accepting product standards adopted in other leading economies as ‘deemed to comply’,
provided that a transparent review could be undertaken in cases where the Australian Government
identified a significant safety risk.

3.4

Avoiding undue constraints to foreign direct
investment

Foreign investment has long been a feature of Australia’s capital markets. Broadly, as a net importer ofdebt-based financing, and a net exporter of equity-based financing, Australia has an interest in promoting thefree flow of capital internationally.
Foreign direct investment (FDI) is more directly associated with innovation at the firm level. For instance,
Breunig and Majeed analysed the BLADE panel dataset of Australian businesses and found foreign ownershipto be an important source of ‘technological growth and innovation novelty’, particularly for larger firms (Majeed
and Breunig 2021). Having foreign ownership was associated with a 1.2% increase in the probability of
new-to-Australia innovations, and a 1.1% increase in the probability of new-to-world innovations.

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Opportunities to facilitate FDI flows
Governments have a role in regulating various aspects of foreign investment and, in doing so, to ensure theregulatory burden of compliance does not unduly deter investment. The importance of regulatory burden wasreflected in recent industry consultations for the Australia’s Service Exports Action Plan, where one of theindustry recommendations (noted by the Australian Government) was to develop:… accessible, user-friendly tools that give greater clarity to foreign investors on how they will betaxed in Australia (such as detailed ‘scenario-based’ taxation guides based around the categories
of financial products specified in the APEC Asia Region Funds Passport). (DFAT 2021a, p. 46)
In 2020, the OECD found that Australia’s FDI screening framework had been more restrictive than in mostadvanced economies (figure 3.7). A new foreign investment screening process began operation on
1 January 2021, implementing a more stringent framework largely designed to manage greater national
security challenges. The key aspects of the new framework include:• call-in powers for the Treasurer, allowing the Treasurer to review a foreign investment action that has notbeen notified• last resort powers for the Treasurer, allowing the Treasurer to review investment actions that had beenpreviously approved by the FIRB
• enhanced monitoring and information gathering powers for authorised officers within Treasury• new categories of investments to be subject to screening, as well as a register of foreign ownership ofAustralian assets• a new fee structure for investment applications, involving higher fees across different categories of investment.
The new foreign investment screening framework could be expected to capture a larger proportion of FDI
investments for review. As such, it is unclear to what extent an increase in FDI applications reflects anincrease in overall investment activity, or simply an increase in the number of investments that now require
screening. In addition, given that FDI levels in the past two years would have been heavily affected by theuncertainty caused by COVID-19 pandemic, it will be difficult to determine the impact of screening on
investment for some time to come.
Indeed, the Foreign Investment Review Board (FIRB) reported an overall increase in the number of FDI
proposals in 2020-21, although trends differed according to the size and industry of investment (figure 3.8).
The decline in lower-value investments could be a reflection of changes to application fees, which are now
proportionally higher for the lower scale of investments. Alternatively, it could also reflect dampening demand
for residential property and other categories of investment.

86Openness to trade and foreign investment

Figure 3.7 – Australia’s FDI processes were already relatively restrictive in 2020
OECD FDI restrictiveness index
a. Screening is the most restrictive aspect of Australia’s FDI policy
Index 1 = Maximum restrictiveness
0.4
0.35

0.3
0.25
0.2

0.15
0.1
0.05

Luxembourg
PortugalSlovenia
Czech RepublicNetherlands
Estonia
FinlandLithuania
LatviaSpain
Germany
Colombia
Hungary
Costa Rica
GreeceDenmark
United Kingdom
Belgium
IrelandFranceSlovak Republic
Italy
Japan
South Africa
Chile
SwedenTürkiyeOECD - Average
PolandBrazilSwitzerland
NorwayUnited States
Austria
Israel
Korea
Australia
CanadaIceland
MexicoIndia
China
New ZealandIndonesia

0Equity restriction

Key foreign personnel

Other restrictions

Screening & approvalb. Australia’s FDI policy has long been more restrictive than the OECD averageIndex 1 = Maximum restrictiveness
0.7
0.6
0.5
0.4

0.3
0.2
0.1
0.0
1997

2003

2006

Australia

2010

2011

2012

2013

China (People's Republic of)

2014

2015

2016

United States

2017

2018

2019

2020

OECD - Average

a. Australia implemented changes to its screening regime from 1 January 2022.
Source: OECD Foreign Direct Investment Regulatory Restrictiveness Index | Market openness Indicators.

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

Figure 3.8 – Trends in FDI applications vary by size and sector
a. Number of FDI applications by investment value

8000

2018-196000

2019-20

5000

2020-21

4000

3000
2000
1000
≥$1m2
<$50m

<$1m
1

Number of proposals

Number of proposals

7000

0

300

2017-18

250
200
150
100
50
0

≥$50m1<$100m≥$100m2<$500m≥$500m3<$1bn≥$1bn4
<$2bn

≥$2bn

5

Investment size

Investment sizeb. Value of FDI applications by sector
100

100

80

80

60

2018-1960

2019-20
2020-21

40

40

Series5

20$ billion$ billion

2017-182000Agriculture
163.1
Forestry,
Fishing

Finance
231.0&
Insurance

Manuf.
195.6
electricity,gas

Mineral
233.0
expl. &
developm.

Services

Commercial
Real Estate

Residential
Real Estate

Source: FIRB (2021).

Potential chilling effects
What is certain is that the recent changes to the foreign investment screening process have increased thecost of making FDI in Australia. This could be expected to reduce investment at the margin and to alter its
composition.
One critical factor of Australia’s screening framework is that it effectively places a tax on foreign investment(given that fees are in excess of cost recovery) at the stage of application (regardless of whether theinvestment is allowed to proceed). It is possible that over time, investors who have had previous applications
rejected may reconsider their future investment intentions.

88Openness to trade and foreign investment

Moreover, despite fees that are already well in excess of cost recovery, they continue to be increased.
Indeed, after being increased at 1 January 2021, they were doubled on 29 July 2022 (Chalmers 2022). The
most recent increase in fees alone was estimated to raise an additional $455 million over the forward
estimates. Given the risk of affecting investment levels, the Australian Government should consider theefficiency of such a tax and its place in the tax system.
Consideration should also be given to the potential for distortions that may result from the differential
treatment of FDI in different sectors. Specifically, FDI in agricultural land and businesses are subject toadditional costs and regulations (box 3.6). Some (if not all) of these additional requirements and costs
appear to be designed to make agricultural investments more difficult or costly in comparison to othercommercial investments — rather than to rule them out altogether, as would be the case where strategicrisks were significant. This approach stands in contrast to the National Farmers Federation’s calls for aseveral-fold increase in foreign investment in the sector within the next decade. 44
A further question relates to how the compliance costs of screening are treated alongside other ‘costs at theborder’. Namely, that aspects of the screening regime have been treated as potential subjects of negotiation
for preferential trade agreements.
Australia has sought to liberalise trade and investment through Free Trade Agreements (FTAs) andwill honour its commitments under those agreements. The commitments include negotiated higher
foreign investment screening thresholds for certain investors. All proposed investments will, however,continue to be screened consistently, regardless of the country of investor. (Treasury 2021, p. 4)
This raises questions as to how well the framework is geared to protect against potential fraud or
national-security issues. As a result of trade negotiations, screening thresholds are more forgiving forcountries with which Australia has implemented trade agreements.
FDI flows into Australia bring a range of important benefits for productivity. Screening frameworks thus
should be designed to promote both national economic and security objectives. Undue compliance costs forinvestors may have the effect of chilling investment at the margin, for little gain. The use of application fees
as a tax base poses such a risk, in part due to the size of the fee for lower and middle investment levels, andin part because it is rendered at the point of application rather than against profits.

Box 3.6 – Additional regulations apply to agricultural land
The additional regulations that apply to FDI in agricultural land do not appear to be linked toadministrative or economic costs. Rather, they reflect a more cautious approach to foreign investment
relative to other sectors.
For instance, application fees for foreign investment into agricultural land is significantly higher than forcommercial land. FIRB (2022, p. 5) guidance on application fees show that:• For agricultural land, application fees start at $13 200 for investments of up to $2 million, increasing intiers for every additional $2 million of investment, up to a maximum of fee $1 045 000 for investments
of more than $80 million.

44 The NFF note that FDI in the primary production stage of agriculture averaged $260 million in the five years to 2018 —well short of their objective of $12.5 billion of annual foreign investment between 2020 and 2030.
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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportBox 3.6 – Additional regulations apply to agricultural land
• For commercial land, application fees start at $13 200 for investments of $50 million or less, increasingin tiers for every $50 million of investment, rising to a maximum fee of $1 045 000 for investments ofmore than $2 billion.
Approved investors in Australian agricultural land are required to register with the ATO on its AgriculturalLand Register, which was established to ‘provide greater transparency about the level of foreign
ownership’ of agricultural land (ATO 2022). While this is not costly for investors, the premise for such aregister is that community confidence must be maintained regarding FDI in agriculture, in such a way that
does not apply to other commercial FDI. Similarly, in its recent review of the Register for Foreign
Ownership of Water Entitlements, the Commission noted similarly that its purpose was mainly forproviding transparency to help maintain community confidence (PC 2021d).
Compared with OECD countries, Australia is relatively restrictive with regard to FDI in agriculture(figure below), noting that the latest estimates for FDI restrictiveness predate the most recent changes to the
FIRB screening framework. While New Zealand is rated as similarly restrictive, other advanced economies
such as Canada, the United Kingdom, and the United States have much less restrictive regulations.
OECD FDI Restrictiveness Index for agriculture, 2020

FDI Restrictiveness Index

0.60
0.50
0.40
0.30
0.20
0.10

Korea
FranceMexicoAustralia
New Zealand
IcelandIsraelPolandCzech Republic
Estonia
Ireland
LatviaJapan
Lithuania
Belgium
CanadaFinlandDenmark
Germany
Chile
Austria
Colombia
Türkiye
Costa Rica
Switzerland
SwedenUnited Kingdom
Netherlands
Spain
Portugal
NorwaySlovenia
Slovak RepublicHungary
Italy
GreeceUnited States
Luxembourg

0.00

Source: OECD (2022).

90

Openness to trade and foreign investment

Recommendation 3.9
Addressing potential chilling effects of the Foreign Investment Review Framework

While the Australian Government should ensure its Foreign Investment Review Framework is fit for its
purpose in addressing fraud and strategic risks, its design should be cognisant of the potential chilling
effects on investment and subsequent costs to productivity. Application fees for proposed foreign direct
investment (FDI) should not be used as a tax base.
More specifically, application fees for proposed FDI into agricultural land assets should be brought closer
into line with other forms of investment, including by:• applying indexation to the threshold investment value, as is done with most commercial investments• adjusting the fee tiers so as to reduce the marginal rate fee as a proportion of the investment amount.

Migration and foreign investment
Over the past decade, the Australian Government has implemented specific visas for investors under theBusiness Innovation and Investment program. While migration policy could potentially be a barrier toinvestment at the margin (and indeed, similar visas have been implemented internationally) these visas arelikely to have a negligible effect on the quantum of foreign investment.
For instance, Complying Investments from Significant Investor Visa holders between 2012 and 2020
amounted to $11.745 billion (Department of Home Affairs 2021), but it is questionable as to what extent thisrepresents new investment that would not have otherwise taken place. The Grattan Institute noted that:… there is little evidence that Australia faces significant difficulties in attracting foreign investment
for profitable activities. Australia is a medium-sized economy with a flexible exchange rate andrelatively free capital mobility between Australia and the rest of the world. As such, Australia has
little trouble attracting foreign investment. (Coates, Sherrell and Mackey 2021, p. 45)
Under the revised complying investment framework, people who hold Premium Investor Visas and Significant
Investor Visas can still allocate much of their funds to listed equities and corporate and government bonds. The
markets for these assets are highly liquid and deep, and attract significant offshore investment. As such, theCommission (2016b) has previously noted that, in the context of Australia’s openness to foreign investment, it isdoubtful whether Significant Investor Visa holders contribute any considerable amount of investment that isgenuinely new to Australia.
Moreover, such investments are associated with the visa approval process, and there is no guarantee that
granting permanent visas would result in ongoing investment from those migrants. Visa holders are typically required
to hold investments for a prescribed duration in order to qualify for permanent residence. This means that, for any
given area of investment targeted by the visa system, any new investment could be short-lived. In addition, it may
provide poor incentives for efficient investment — anecdotal evidence suggests that some applicants consider
their investments as simply a means of qualifying permanent residence, and may be less concerned aboutchoosing investments on the basis of expected returns (Coates, Sherrell and Mackey 2021, pp. 46–47).
As noted previously by the Commission, the absolute quantum of additional investment associated withinvestor visas could still be material considerable if the number of visas were large. However, increasing theallocation of permanent visas to these streams would crowd out other forms of permanent migration,
including skilled migration. As such, the use of such visas should be considered in the context of otherpotential impacts — particularly regarding any skills visa holders bring, and the overall fiscal implications of
the program (discussed further in chapter 2 of volume 7).
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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report

3.5

Facilitating trade in services

As noted above, some of the gains from trade and investment are directly observable in the short-term —increased competition and innovation can improve market efficiency. Trade competition can also change
how resources are allocated across the economy. Indeed, trade liberalisation has contributed to theformation of Australia’s service-based and resource-exporting economy.
Trade in services will be increasingly important for Australia’s productivity growth for two reasons: themajority of Australia’s output (by value) lies in the services sector; and that global trade in services is likely toincrease in scale (both in import and exports).
For governments, facilitating trade in services entails different complications than trade in goods. The former cantake place remotely or within the consuming or producing country (box 3.7), giving rise to a range of potential roles
for policy: one is to ensure open trade policy settings; another involves reform across the regulatory landscape inorder to make trade in services more practical, and to make Australia a more attractive market for trade.

Box 3.7 – Types of trade in services
Mode 1: Cross border supply
This occurs when a service is supplied from one country to another, but only the service crosses theborder (i.e. neither the supplier nor the consumer moves). Examples of cross border supply include: anAustralian company contracting an Indian company to provide call centre services (service debit); an
Australian company providing legal advice over the phone to a company overseas (service credit).
Mode 2: Consumption abroad
This mode of supply occurs when the consumer moves across a border to access services (i.e. thesupplier does not move). Examples of consumption abroad include: an American tourist consuming
travel services (accommodation, food and entertainment) while they are visiting Australia (service credit);an Australian who travels to the United Kingdom to complete a university degree (service debit).
Mode 3: Commercial presence
Commercial presence requires the service supplier to set up operations in another country to provide services
there. In this mode only the supplier moves from their resident country, establishing an on-the-groundpresence in the consumers’ market as a foreign affiliate. Examples of commercial presence include: anAustralian university establishing a campus in Asia (service credit); a Chinese hotel chain opening a resort
within Australia (service debit). (Mode three is not included in ABS international trade in services statistics.)
Mode 4: Presence of natural persons
In mode four the services supplier moves temporarily from one country to another to deliver services.
Examples of presence of natural persons include: an employee of an Australian software company flying toFiji to deliver training (service credit); an architect from an UK-based firm working in New South Wales toprovide consulting services for a new development in Sydney (service debit).
Source: ABS (2021).

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Openness to trade and foreign investment

How restrictive are current policy settings?
The OECD found that the global regulatory environment became more restrictive in 2020 across all services
sectors covered by the Services Trade Restrictiveness Index (STRI), despite governments lowering barriers
to digital trade in 2020.45 While Australia has not been immune to this trend, Australia’s regulatory landscapeis less restrictive on trade in services than most comparable countries (box 3.8).
To this end, there has been mixed progress in terms of multilateral agreements on services trade. There has
been little to no progress in establishing a Trade in Services Agreement (TiSA) and no new rounds ofnegotiations have taken place since 2016 (DFAT nd).46 However, some progress has been made on digital
services trade, mainly by including e-commerce provisions in 14 of Australia’s trade agreements, as well as
the Digital Economy agreement with Singapore.

Box 3.8 – The OECD Services Trade Restrictiveness Index
The OECD STRI collects information on services trade restrictions across 19 major services sectors. The
project has two distinct but complementary instruments: a services trade regulatory database and aservices trade restrictiveness index. These instruments provide a rich source of information for trade policy
makers, trade negotiators and researchers, and an instrument for impact assessment of tradeliberalisation. The STRI further allows individual countries to benchmark their services market regulations
against the global best practice, identify outlier restrictions and current bottlenecks.
The regulatory database contains laws and regulations collected from 45 countries: the 36 OECD Member
economies, Russia and key partners (Brazil, China, India, Indonesia, Malaysia and South Africa), as well as
countries having accession discussions with the OECD. Based on the qualitative information in the database,composite indices quantify the identified restrictions across five standard policy categories, with values between
zero and one. Complete openness to trade and investment gives a score of zero, while being completely
closed to foreign services providers yields a score of one. Some factors considered in the STRI include:
•
•
•
•
•
•
•

foreign equity restrictions (e.g. limits on foreign equity share)
statutory monopolies
duration of stay for temporary services suppliers
public procurement practices
visa processing times
time, cost, and number of procedures required to register a company
requirements for nationality for a full licence; or requirements to redo their training.

45 The OECD’s methodology for estimating regulatory restrictiveness to trade in services involves several simplifying

assumptions and proxies. The qualitative assessment of each country is based largely on binary (yes/no) questions, withthresholds applied in some cases.
46 Twenty-seven WTO members (including Australia, and representing 70% of global trade in services) initiatednegotiations for the Trade in Services Agreement in March 2013 (DFAT nd; US Government nd). The Agreement was
intended to reduce barriers to international trade in services (DFAT nd) and deal with modern trade concerns such as
cross-border data flows (US Government nd).

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5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportBox 3.8 – The OECD Services Trade Restrictiveness Index
Australia is less restrictive than most comparable nations, 2021
Index 1 = Maximum restriction
0.6
0.5
0.4
0.3
0.2

0

Czech Republic
Japan
Chile
Netherlands
LatviaUnited Kingdom
Germany
Lithuania
Colombia
Spain
Australia
Ireland
New Zealand
Denmark
Slovak Republic
United States
Costa Rica
Portugal
Luxembourg
FranceKorea
Estonia
Peru
CanadaAustria
SwedenFinlandSingapore
South Africa
Hungary
PolandSlovenia
MexicoSwitzerland
GreeceChina (People's…
IsraelItaly
Belgium
Türkiye
NorwayBrazilMalaysia
Viet Nam
RussiaKazakhstan
Iceland
India
ThailandIndonesia

0.1

STRI

Average

Source: OECD (2023).

A range of policy levers facilitate trade in services
The Australian Government outlined their interest in boosting services exports beyond education and tourism inthe 2017 Foreign Policy White Paper. The Australian Government subsequently outlined the Services Exports
Action Plan (SEAP), which aims to promote open trade in services, including through ‘ease of movement ofpeople, capital, services and data across borders’ (DFAT 2021a) (box 3.9). While in some cases, the AustralianGovernment can only address these barriers by representing Australia’s interests in international fora (such as
via the WTO and trade agreements), several aspects of the Australian regulatory environment are likely tocontribute to the facilitation of service imports and the attractiveness of Australian service exports.

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Openness to trade and foreign investment

Box 3.9 – Australia’s Services Exports Action Plan
The Department of Foreign Affairs and Trade (DFAT) were given $1.5 million to ‘develop an industry-led
initiative to address barriers to Australia’s services exports and boost our services competitiveness’(DFAT 2021a, p. 17). The plan identified five macro-level outcomes that reflect the interests of Australia’s
services sector:
•
•
•
•
•

free and open international trade in services
best practice systems and rules across Australia
world class skills and talentcutting edge and internationalised services in Australia
information-driven policies and business strategies.

The action plan contains 72 recommendations, of which, the Australian Government has agreed to,agreed-in-principle or noted 64 and not agreed to 8.
What was not agreed in the Australian Government’s initial response?
• Commission an independent review of Australia’s skilled visa regime.
• Lift the restrictions on skilled migration to include people over the age of 50 to improve Australianservices firms’ access to qualified personnel. (Age limits only apply to permanent migration).
• The Australian Prudential Regulation Authority (APRA) should review prudential, licensing and capitalrequirements for Australian financial services exporters, with a view to ensuring regulatory arrangements
do not unfairly prejudice the ability of these firms to establish an offshore commercial presence.
• The Australian Government should expand the Australian Securities and Investment Commission(ASIC) mandate, requiring it to consider the effect of decisions on the international competitiveness ofAustralian financial services firms offshore.
• Ensure Australia has ready access to the best tech talent. In addition to recommendation 5A, one option
could be to expand the New Colombo Plan to facilitate technology-focused learning exchanges with theUnited.
• With input from the financial services sector, DFAT should review the extent to which information fromTreasury, ASIC and APRA is captured in the FTA Portal, with a view to providing more comprehensive
and consolidated information for financial services exporters.
• The Government should extend grant limits and raise the revenue threshold of the Export Markets
Development Grant (EMDG) scheme to support established firms entre new and challenging markets
overseas.
• Establish a regulatory sandbox that allows health services firms to offer low-risk health services anddigital tools to controlled markets, providing an early market test for safety, efficacy, economics andenabling pre-market surveillance for regulators.
Source: DFAT (2021a).

The OECD’s STRI provides a useful taxonomy of regulations that affect the relative openness of policy
settings to services trade — many of which are discussed elsewhere in this report.
• Tax and compliance costs, including the costs associated with procedures required to register or unwind acompany, are among several fundamental aspects of business regulation that have a direct influence on
investment (chapter 2).

95

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry report• Foreign equity restrictions apply in several countries, often involving caps on equity holdings for foreign
nationals. As discussed above, the more prescient issues facing FDI inflows to Australia involve complianceand other costs at the border. Application fees in particular should be set with (tax) efficiency in mind.
• Occupational licensing is an important safeguard for quality of service in many occupations, particularly
where information asymmetries can prevent consumers and clients from choosing appropriate suppliers,and particularly where health and safety risks are present. However, a misalignment of licensing regimes
between Australia and other countries, or rigidities in licence recognition between jurisdictions, canprevent qualified suppliers from providing services within the Australian market (chapter 3 of volume 7).
• Temporary migration can make the delivery of services difficult in practice — not only in terms of policy
settings, but their administration. Services supplied via a commercial presence may require temporary
migration. Decisions are likely to be affected by the allowed duration of stay for particular visas, as well as
the processing times, compliance costs, and uncertainty associated with visa applications (discussed inchapter 2 of volume 7).
With regard to migration, the skilled worker visa subclasses are likely to be of particular relevance trade inservices. However, trade in services may also benefit from the migration of entrepreneurs. This would include
highly skilled workers who operate their own businesses — fulfilling supply contracts for Australian clients as
opposed to being employed by Australian businesses. The differences between these types of suppliers ismerely contractual, and should not result in different arrangements in the migration system.
The Commission has previously pointed out significant issues with the design of Significant and Premium
Investor Visas. They do not effectively target forms of investment that are otherwise lacking, and are subject torelatively lax requirements compared with other permanent migration visas (potentially leading to poorer
migration outcomes or fraud). There are good arguments for abolishing these visas as they currently stand.
However, there would be value in devising new visas to better target entrepreneurs involved trade in services.

Recommendation 3.10
Prepare for increased global trade in services

In order to ensure the Australian economy is well-placed to benefit from the global increase in trade inservices, Australian governments should reduce barriers to trade in services both ‘at the border’ and‘behind the border’. This will require consideration of not only trade policy (recommendations 3.7 and 3.8),
but also tax settings (recommendation 3.4), occupational licensing (recommendations 7.9 to 7.12), foreign
direct investment (recommendation 3.9), improved recognition of overseas qualifications(recommendations 7.7 and 7.8) and temporary migration settings (recommendation 7.5).

96Abbreviations

Abbreviations
ABS

Australian Bureau of Statistics

ACC

Allowance for corporate capital

ACCC

Australian Competition and Consumer Commission

ACE

Allowance for corporate equity

AGCNCO

Australian Government Competitive Neutrality Complaints Office

ANZSCO

Australian and New Zealand Standard Classification of Occupations

ANZSIC

Australian and New Zealand Standard Industrial Classification

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investment Commission

ATO

Australian Taxation Office

BLADE

Business Longitudinal Analysis Data Environment

CBA

Cost-benefit analysis

CBIT

Comprehensive business income tax

COVID-19

Coronavirus disease (an infectious disease caused by the SARS-CoV-2 virus)

ERA

Effective rate of assistanceEU

European Union

EV

Electric vehicle

FDI

Foreign direct investment

FTAFree trade agreement (also referred to as a preferential trade agreement)

GBE

government business enterpriseGDP

Gross Domestic Product

HHI

Herfindahl-Hirschman Index

IT

Information Technology

ICT

Information and Communication Technology

IPART

Independent Pricing and Regulatory Tribunal

MPAA

Major Projects Facilitation Agency

MPF

Major Project Facilitation

MPFA

Major Projects Approval Agency

NBN

National Broadband Network

NDIA

National Disability Insurance Agency

NDIS

National Disability Insurance Scheme

97

5-year Productivity Inquiry: A competitive, dynamic and sustainable future Inquiry reportOECD

Organisation for Economic Co-operation and Development

PC

Productivity Commission

PTA

Preferential trade agreement

RBA

Reserve Bank of Australia

SME

Small and medium enterprise

STRI

OECD Services Trade Restrictiveness Index

TSS

Temporary Skill Shortage

UK

United Kingdom

UN

United Nations

US

United States

ZLEV

Zero and low emission vehicles

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—— 2021, World Trade Report 2021, World Trade
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September 2022).
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Yellen at LG Sciencepark, US Department of the Treasury,
https://home.treasury.gov/news/press-releases/jy0880(accessed 14 September 2022).
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Report no. 100 – 7 February 2023

5-year Productivity Inquiry:
Australia’s data and digital
dividend
Inquiry report – volume 4i5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

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and Elders past and present.

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ii

Contents

Contents
Prefaceiv

1.

Use of digital technology and data in the Australian economy

1

1.1

Economic gains from using technology and data2

1.2

International comparisons on technology and data use

16

2.

3.

Potential barriers to adopting new technologies and data

21

2.1

Business-level barriers to digital and data uptake

21

2.2

Broader limitations in the digital and data environment

24

Targeting government investments and policy priorities

33

3.1

Investing in regional digital infrastructure

34

3.2

Creating new data sharing and integration opportunities

46

3.3

Developing digital, data and cyber security skills

63

3.4

Balancing cyber security and growth

76

3.5

Supporting ethical use of technology and data

83

3.6

Coordinating the policy and regulatory environment

89

Appendices

93

A.

Modelling business technology adoption

95

B.

Stylised simulations of economy-wide effects

99

Abbreviations

103

References

105

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iii

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Preface
Digital technology and data have transformed our economy and society. In just a couple of decades,
smartphones have become ubiquitous, social media has changed the way we communicate and consume
content and the volume of data we produce has increased exponentially. These trends have accelerated
following the COVID-19 pandemic — e-commerce via online retail purchases, online delivery of humanservices and digitally enabled work from home are now widespread across Australia.
The benefits for productivity of increasing digitisation are diverse and diffuse. In many cases, theyarise from technology enabling us to collect, transmit and analyse data more cheaply and quickly than everbefore. Consumers can now easily search for products that best meet their preferences and verify productquality through online information. Businesses can deliver services more flexibly and efficiently astechnology and data enable faster adjustments, increased scale at lower cost and innovation opportunities.
And governments can make better-informed decisions about policy design and implementation, both at thesystem level and to address local community needs.
Crucially, many of these benefits are particularly evident in services sectors, which have historically had
more difficulty achieving productivity growth. The positive impacts of digitisation and data use can also
extend beyond productivity, by improving economic and social inclusion and living standards more broadly.
Australians are already adopting digital and data tools as they recognise the potential gains. Almost all
businesses are connected to the internet, over half have a web presence, 68% have placed orders over theinternet and 57% have adopted cloud technology. Growing adoption often follows from businesses’ (andindividuals’) private assessments that the benefits of technology and data use exceed the costs, with little
government support required.
Nonetheless, Australia’s digital and data transformation is far from complete. Technology changes rapidly
and new productivity-enhancing applications are continuously emerging.
Technologies such as artificial intelligence (AI), the internet of things (IoT), robotic automation and big data
analytics could revolutionise how businesses operate across the economy — and, indeed, are alreadydisrupting various sectors. The productivity gains can be significant, from robot-assisted warehouses that
automate online order fulfilment and reduce accidents, to AI-enabled IoT sensors installed in smart cities thatallow real-time optimisation of infrastructure, energy and service use and maintenance notification.
Many of these emerging digital and data applications do not merely lead to cost reductions, but can also
result in better-quality goods and services and more product choice for consumers. Australia needs to keep
pace with technological developments to underpin our future economic prosperity.
However, several factors could limit further adoption among Australian businesses — inadequate internet,
lack of skills, low awareness and uncertainty about benefits, security concerns, cost and legacy
systems are identified as barriers. And while we do well compared with other developed economies onfoundational aspects of technology and data use (such as internet connections and data volumes), we are
falling behind on some more advanced indicators. Australia’s internet speeds are relatively low and businessuse of data-driven technologies, such as AI and analytics, trails uptake in other countries.
Some of these issues will be resolved with further technological progress, as has occurred with previous
changes. Emerging applications of technology will become more widely known, and growing awareness ofiv

Preface

their uses and benefits will facilitate more uptake as adoption shifts from the small share of early innovators
to the mainstream majority of businesses (moving up the technology adoption ‘S curve’). The costs ofimplementing new digital and data solutions are also likely to decrease over time, as computing power
continues to improve and economies of scale increase with adoption, and as basic digital skills in the
population are improved with each successive generation.
But in other instances, government can play a role in facilitating more and better use of technology
and data. This is particularly the case when government agencies provide, regulate or fund a service, or
when the factors limiting uptake are systemwide issues that can be addressed through broader policy
enablers, such as incentive frameworks or access rights. In this volume, the Commission identifies threesuch enablers where government investments and policies provide foundations for adopting
productivity-enhancing digital and data tools, and suggests potential improvements.
• Digital infrastructure, particularly in regional and remote Australia, is required to deliver productivityenhancing access to low-cost and reliable internet for local businesses and workers, and increases social
inclusion by ensuring that regional and remote Australians can access quality essential services andexpertise that are increasingly available online. Government already invests in regional digital
infrastructure, but current funding often lacks transparency and accountability. Transitioning to atechnology-neutral tender mechanism for allocating funding when market conditions allow could increase
efficiency and transparency while guaranteeing minimum service outcomes.
• Data sharing and integration has been an ongoing focus of the government. Recent progress includes
the Consumer Data Right rollout, a new national regime for public sector data sharing and individual
agency collaboration with the private sector such as the ATO’s pioneering partnerships with software
providers. Implementing a more comprehensive system for sharing and using health data (withappropriate data security and privacy safeguards), as well as for other government-funded services, would
create new opportunities for data-enabled productivity gains.
• Technical digital and data skills are increasingly demanded not just in Australia’s technology sector, but bybusinesses across all industries as economic and social activity becomes more digitised (particularly since
COVID-19). Many formal and informal education and training options exist, with employers and workers
already using these to meet their skill needs over time. Migration policy can also play a major role inproviding skilled workers who have sophisticated digital and data capabilities developed overseas, and thispolicy may be used to address immediate workforce gaps or obtain skills that are difficult to develop locally.
Beyond these areas, community trust in new applications of technology is critical for future uptake, asbusinesses and governments need to maintain their social licence to deliver digital and data-enabled
services. Many factors contribute to building trust, and two important aspects are having secure and ethicaldigital and data practices. But organisations sometimes underinvest in these areas; for example, smaller
businesses in particular may lack the expertise to invest in cyber security, potentially creating broader
vulnerabilities and undermining trust, which ultimately stymies adoption. Governments can play a role insupporting secure and ethical uses of technology and data — for instance by regulating high-risk settings —but intervention should be carefully balanced to avoid discouraging private sector investment and innovation.
Digital technology and data will continue to shape global economic growth and social change over the
coming years. Whether Australia fully realises the productivity dividend arising from these opportunities
depends on how effectively governments, businesses and individuals can recognise and safely harness
these changes for our own benefit. This volume of the 5 Year Productivity Inquiry presents the Commission’s
findings and recommendations for government to support future data and digital activity.

vUse of digital technology and data in the Australian economy

1.

Use of digital technology anddata in the Australian economy

Key points
Digital technology and data have the potential to significantly improve Australia’s productivity.
• Digital technology and data can reduce business production costs. Examples include lowering search costs(e.g. algorithmic search engines compared with manual search), transportation costs (e.g. using digital tools
to generate and transmit data rather than paper records) and verification costs (e.g. establishing identity andreputation online instead of in person).
• Greater use of digital technology and data can improve product quality and consumer choice, particularly inthe services sector. Millions of phone apps, online banking, telehealth consultations, computer-assisted
services such as counselling, and entertainment streaming services are examples of improved and/or new
products enabled by technology and data.
Digital technology and data use has steadily increased for much of the past decade, as morebusinesses and consumers recognise the benefits of digitisation. COVID-19 accelerated this trend —many businesses were forced to operate only online, such as retailers making online sales, and more
people worked from home.
Businesses face benefits and costs from adopting digital and data tools that likely vary based on
characteristics such as their size and industry. This could explain the variation in the rates at which
technologies diffuse across the economy, and may affect dispersion in business performance.
• Larger businesses are more likely to adopt digital and data tools than small businesses.
• Businesses in regional or remote areas are less likely than businesses located in cities to use customer
relationship management and enterprise resource planning software.
• The type of technology adopted and its relevance varies between industries. For example, knowledge
intensive service businesses are more likely to use artificial intelligence (AI), while businesses in industries
that are reliant on physical equipment are more likely to use radio frequency identification tags.
Compared with other developed countries, Australia does well on basic measures of technology anddata uptake, but is falling behind on more advanced uses. This could limit future productivity growth.
• Australia has relatively high internet coverage and data download volumes.
• Australia’s internet speeds and use of AI and data analytics are relatively low.

1

-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

1.1

Economic gains from using technology and data

Digital technology and data are two separate — though sometimes related — concepts.
• Digital technologies are electronic or computerised devices and systems that usually enable repetitive,
and often time-consuming, operations to be undertaken more quickly (and sometimes more safely androbustly), such as through online or automated methods.
• Data refers to ‘representations of facts that are stored or transmitted as qualified or quantified symbols. It
comprises material such as characters, text, words, numbers, pictures, sound or video’ (PC 2017a, p. 54).
The two are increasingly related because while data does not require technology (for example, a patient’s
medical history handwritten by their doctor on paper is still data), digital tools and systems have enabledlarge amounts of data to be gathered, stored, organised and analysed. Globally, the amount of digital data
being generated is increasing at an incredible rate, with estimates that ‘the present rate of digital content
production is about 2.5 quintillion digital data bytes produced every day on Earth’ (Vopson 2020, p. 1).
Researchers observe that:… technology has lowered the cost of collecting, distributing and using data … [and] many firms
are exploring and experimenting with these technologies. They can potentially generate many
benefits for producers and users. (Duch-Brown, Martens and Mueller-Langer 2017, p. 4)
In this manner, digital technology and data often combine to create value: data’s value is enhanced becauseof what can be done with it using technology; technology has value in part because its use can generate
digital data and because of its role in storing, processing and analysing data.
There are a range of technologies that are causing, or have the potential to cause, rapid changes in the way
our economy and society functions — both by virtue of the technology itself and because of what it enables
us to do with data (box 1.1).

Box 1.1 – Examples of potentially transformative technologies
Cloud computing is the delivery of computing services (such as data storage, networking and analytics)
over the internet. It allows users to access these services on demand, often via a ‘pay-as-you-go’ model,
which improves flexibility and can lower costs.
Artificial intelligence (AI) is the ability of computers to simulate human intelligence and perform
associated tasks (such as speech recognition, moving objects and strategic decision making) in an
automated fashion. Machine learning is a type of AI in which a computer algorithm automatically
improves its predictions through more data and experience.
Data analytics uses data to gain insights for decision making. The data can come from anywhere, suchas consumer purchasing behaviour, weather events, the stock market, the human genome or student
test scores. Data analysis can be as simple as calculating averages, or can involve complex methods
like machine learning. It also involves producing predictive statistics and data visualisations.
Blockchain is ‘a shared, immutable ledger that facilitates the process of recording transactions andtracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible(intellectual property, patents, copyrights, branding)’ (IBM nd). ‘Web 3.0’ aims to use blockchain
technology to remove the centralised nature of the internet (‘web 2.0’) and increase security and trust.

2

Use of digital technology and data in the Australian economy

Box 1.1 – Examples of potentially transformative technologies
The Internet of Things (IoT) involves ‘connecting any device… to the Internet and to other connected
devices. The IoT is a giant network of connected things and people – all of which collect and share data’(Clark 2016). Examples of IoT include connecting devices together in the home, using sensors to
streamline production in a factory and using geolocated devices to improve road congestion.
Virtual reality uses computer simulation to allow users to interact with a virtual environment. Conversely,
augmented reality superimposes digital images on the real world to facilitate interaction with thephysical world. They can be used as interaction tools for digital twins to solve issues such as making
human-robot collaboration safer (Pérez et al. 2020) or workflow problems (Havard et al. 2019).
Robotic process automation is the use of software that enables ‘bots’ to emulate human behaviour andcomplete automated tasks. This can be used in industries where simple and repetitive tasks can be
automated such as data entry, addressing customer queries and automated internal communications.
Bots are also finding applications in human services, such as for assessing healthcare consumers
receiving care in their home (Medibank 2022).
3D printing is the process of creating solid objects from digital files. It can be used to create consumer
and industrial products, as well as health products like dental implants and prosthetics.
Quantum computing utilises quantum mechanics to ‘solve problems too complex for classicalcomputers’ (IBM nd). The exponential increase in computing power that quantum computing could offer
would revolutionise AI and cyber security, make financial forecasting far more precise and vastly improvethe efficiency of complex manufacturing (Bova, Goldfarb and Melko 2021).

How can digital technologies and data contribute to productivity?
Under a standard economic growth model, there are two main ways that digital technologies and the use ofdata contribute to the production process and therefore to economic activity. They can be thought of as
direct inputs to the production process or as part of the ‘residual’ portion of output growth that cannot be
attributed to capital or labour inputs.
Businesses can invest in digital technologies as capital inputs, including physical and tangible capital suchas computer hardware, as well as intangible inputs such as software programs and ways to collect, store andanalyse data. This capital is then used to produce goods and services — for example, a retailer uses their
computer systems to manage supplier and customer orders, or a bank applies an algorithm to customer data
to inform their loan assessment. Investing in digital technologies as capital inputs can substitute for labour
inputs (such as by automating tasks previously done by workers), complement existing labour (for example,
time-saving digital tools allow workers to do more value-adding tasks) or create different processes or
outputs requiring more labour or new skills.
The classical economic production function sometimes refers to the residual, after capital and labour have beenaccounted for, as ‘technology’ (instead of ‘total factor productivity’). This concept is broader than the examples
outlined in box 1.1 and captures the effects of all manner of technologies including ‘general purpose technologies’,
which are ‘characterized by the potential for pervasive use in a wide range of sectors and by their technologicaldynamism’ (Bresnahan and Trajtenberg 1995). While computers and the internet are examples of suchtechnologies, others predate the recent digital revolution and include the steam engine and electricity (Lipsey,3

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reportCarlaw and Bekar 2005). Such technology improvements can have a multiplier effect on output by increasing the
productive potential of an economy for a given amount of capital and labour inputs. They can also facilitate
complementary innovations; for example, computers are used for purposes well beyond their original function of
performing complex mathematical calculations (Brynjolfsson and Hitt 2000).
Data is a unique input because, unlike most other production inputs such as materials and equipment, it is‘non-rivalrous’: many agents can make use of the same data at the same time without it being “used up” ordegraded (Smedes, Nguyen and Tenburren 2022, p. 3). This means that data can make a larger economic
contribution than more traditional inputs, as multiple businesses can use the same data to produce different
outputs. Research has found that businesses reporting the greatest growth in revenue and earnings received
a significant proportion of that boost from data and analytics, with high-performing organisations three times
more likely than others to say their data and analytics initiatives have contributed at least 20% to earnings
before interest and taxes over the past three years (McKinsey 2019).
However, in many cases data can be made ‘excludable’ — it is usually the way that data is stored and accessedthat determines whether other parties can be excluded from using it. For example, data may be encrypted or a
private entity that collects data may choose not to share it for others to use. Sometimes this is desirable because it
provides incentives for collecting data, such as businesses gathering customer data to improve their products andgain a competitive advantage. At the same time, excluding others from accessing and using data can mean thatthe value of data as an input to the production process is not fully realised (section 2.2).
In addition to their role as production inputs, both digital technology and data can be considered as theoutputs of production in some contexts. For example, software companies produce digital applications as
their output, which can either be sold directly to consumers or used as inputs by other businesses that wish
to automate their processes but do not have the technological capabilities to create their own applications.
And the media content produced by streaming services represents data that is these companies’ output —with a consumer’s selection of which content they view, becoming data used by companies as an input topreview future content for that consumer.

Better use of technology and data can improve productivity …
Businesses can use digital tools, often in combination with data, to reduce their production costs, although
this may not immediately translate to productivity growth due to lags in price adjustments (Basu, Fernald andKimball 2006). Various researchers have found positive relationships between technology adoption andproductivity or GDP growth (box 1.2), and Goldfarb and Tucker (2019) outline a range of channels throughwhich technology can lower businesses’ costs.
• Search costs — the internet makes it easier to find information and therefore lowers search costs for bothcustomers and businesses. Moreover, algorithmic search engines use data to improve the relevance andaccuracy of search results, further reducing these costs.
• Replication costs — processes using digital technologies can have low marginal costs after the fixed costsof development and implementation are incurred. For example, a bank that invests in technology tosupport its risk assessments can readily scale this across multiple customers and products.
• Transportation costs — there are near-zero costs associated with transporting digitised data over theinternet, compared with higher costs of transporting (for example) paper-based records. This also has
implications for the location of people, as technology enables geographically isolated individuals andcompanies to connect at lower cost, facilitating new employment models such as offshoring.
• Tracking costs — digital tools can help businesses to keep track of relevant data from customers andsuppliers at lower cost, though better tracking has also made privacy a key issue. Analysing this data canhelp businesses to streamline production or distribution.

4

Use of digital technology and data in the Australian economy• Verification costs — technology and new data sources can make it easier to verify the identity andreputation of another party in a business transaction, so that it is less costly to build trust between parties(for example, less need for repeated interactions).

Box 1.2 – Technology and productivity: empirical evidence from previous researchStudies from a range of countries have found a positive relationship between technology adoption andproductivity or GDP growth. In several cases, the evidence suggests that the economic benefits fromusing technology are larger for businesses that have also invested in complementary areas, such as
management capabilities and data assets.
• Gal et al. (2019) looked at the effect of technology adoption on productivity in 19 EU countries andTurkey, finding that ‘an industry environment characterised by high digital adoption rates is associatedwith higher [multifactor productivity] growth in the average firm’ (Gal et al. 2019, p. 18). The researchalso found evidence that the gains from digital technology are dependent on ‘intangible assets andskills (e.g. data, tacit knowledge, organisational capital) and complementary additional investments inthese factors’ (Gal et al. 2019, p. 31).
• Vu (2013) examined the impact of ICT on Singapore’s GDP and average labour productivity (ALP)
growth. The research found that ‘ICT capital played a substantial role in Singapore’s growth,
contributing 1.0 percentage point to GDP growth and 0.8 percentage points to ALP growth in1990-2008’ (Vu 2013, p. 18).
• Bloom, Sadun and Reenen (2012) investigated the relationship between technology and labour
productivity for multinational companies. Doubling the IT stock was associated with a 6.3% labour
productivity increase for US multinationals and 4.6% for non-US multinationals (Bloom, Sadun and
Reenen 2012, p. 180). The researchers also demonstrated that the higher productivity gains for US
multinationals were attributable to better management practices, which complemented IT investment.
• Borowiecki et al. (2021) studied the effects of digitisation on firm productivity in the Netherlands,
finding positive and significant productivity impacts from investment in ICT hardware and intangibles(as measured by levels of digital skill intensity). Their results held using both labour productivity andmultifactor productivity as the measure of productivity.
• Qu, Simes and O’Mahony (2017) examined the relationship between economic activity and technology
use, measured through internet access and mobile phone penetration, in 37 countries. They foundthat from 2004 to 2014, after controlling for other inputs such as physical and human capital, ‘thediffusion of digital technologies significantly improved economic output in Australia and abroad,contributing to steady-state gross domestic product per capita growth of approximately 5.8% on
average [over the whole decade]’ (Qu, Simes and O’Mahony 2017, p. 57).

The capacity of businesses to use new technologies and the impact on their performance varies with theircharacteristics and capabilities, which leads to heterogenous uptake of digital technology and data use(discussed in more detail below). The complex variety of benefits that can stem from using multiple
technologies in combination also contributes to this heterogeneity; as do differences in the nature of theavailable data that can be analysed using digital tools.
For example, industries that make greater use of equipment could be more likely to benefit from the Internetof Things (IoT) and sensors integrated into their equipment, such as resources companies using sensors togather real-time data on their machinery to improve maintenance and operational performance (PMC 2021c,

55-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reportp. 7). Technology has lowered the costs of gathering and transporting information, as well as the costs oftracking and monitoring their equipment. In contrast, industries that are centred on human decision making
might be more likely to find applications for AI, such as banks investing in bill management algorithms or
automating qualifying decisions on new customers and their loan limits (Agarwal, Singhal and Thomas 2021;
CBA 2022). In these examples, technology has lowered the cost of verifying the customer information
underpinning these decisions, and reduced replication costs for making these decisions across manycustomers.
This is not to say that particular technologies are exclusively used by businesses in specific industries;
however, it does suggest that what data and digital adoption looks like will vary across the economy.
Australian businesses’ adoption of different data and digital tools and how this differs across industries isfurther examined below.
Real cost reductions are not the only way that digital and data enabled productivity improvements benefit
Australians. The fruits of productivity growth can also be experienced as quality improvements – the things
that get better (in measured and unmeasured ways); and new things – inventions so novel that they can besaid not to have existed before and perhaps were not even conceived of by most people, but that create newvalue for society (Brennan 2021).
New uses of technology and data often lead to product improvements and greater choice, particularly in theservices sectors, which have historically had more difficulty achieving productivity growth. Digitisation cancreate novel ways for customers to interact with businesses and service providers (such as online banking,telehealth consultations and computer-assisted services such as counselling) or even entirely new products(such as social networks, search engines, phone apps and streaming entertainment). Sometimes the main
enabler of improvements is technology-driven cost reductions through one or more of the channels
discussed above. In other instances, the key enabler is better use of data; the channels through which data
itself provides economic benefits are discussed in section 2.2. Many significant changes have resulted froma combination of both, with the digitisation of data enabling benefits on a larger scale.
For example, the digital tools that have enabled businesses to track customer data at lower cost can also
provide the means for businesses to offer more personalised goods and services that are tailored to anindividual customer’s needs. This results in a better-quality product for the customer while also sharpening
allocative efficiency by improving business decision making about resource allocation. In this example, thesubstantial value that can be gained from collecting and analysing this data provides the rationale for manyretailers to offer loyalty programs, some of which can span multiple product categories.

Finding 4.1
Technology and data are enablers of productivity growth
Digital technology, combined with data, can help businesses to improve their productivity by lowering thecosts of search, replication, transportation, tracking and verification. It can also lead to
productivity-enhancing product improvements and greater choice, particularly in services sectors, whichhave historically had more difficulty achieving productivity growth.

… but measuring the digital economy is challenging
Given the many potential benefits of digital technologies and their applications in creating value from data,
they are ubiquitous in one form or another throughout every part of Australia’s economy.
6Use of digital technology and data in the Australian economy

There are many jobs, products and processes that can be identified as digital activities — such as IT
support, computer product manufacturing and developing software. Taking together these observable
components, the ABS reports that digital activities make a large economic contribution, representing about
6% of total value added in 2020-21 (figure 1.1). However, this is an underestimate of the economic value ofdigital technologies. The ABS’s estimates reflect the output associated with products that are ‘primarily digitalin nature’, but do not measure the economic value attributable to the ubiquitous and embedded use oftechnology in other products. For example, much of the mining industry’s output depends on digitaltechnology — Rio Tinto’s Gudai-Darri mine in the Pilbara is one of the most technologically advanced in theworld. It uses ‘autonomous trucks, trains and drills, as well as the world’s first autonomous water trucks, anda robotic ore sampling laboratory’ (MCA 2022, p. 11).
Other estimates of the size of Australia’s digital economy, or the contribution of technology to the economy,
range from being similar in magnitude to ABS estimates in figure 1.1, to far in excess of these. Thesevariations are partly attributable to differences in how digital technologies are conceptualised and how theirimpacts are measured.
• AlphaBeta examined the technology sector’s contribution to Australia’s GDP both directly — throughindustries such as internet publishing and computer system design, and internet related profit shares inwholesale and retail trade — and indirectly — based on estimating the share of profits and wages in otherindustries attributable to technology. They estimated that, combining direct and indirect contributions, thetechnology sector represents 6.6% of GDP (AlphaBeta 2019a, p. 11).
• The Tech Council of Australia estimated that technology sector activity contributed $167 billion to Australia’s
GDP in 2020-21, representing 8.5% of Australia’s total economic output (TCA, sub. 51, p. 1). Its estimates
capture segments of the information media and telecommunications; professional, scientific and technicalservices; retail trade; and wholesale trade industries, which it observes have all outpaced average market
sector industries’ multifactor productivity growth in the decade to 2020-21 (TCA, sub. 51, p. 2).
• Oxford Economics and Huawei considered digital spillovers, which happen ‘when technology accelerates
knowledge transfer, business innovation, and performance improvement within a company, across supply
chains and amongst industries’ (Huawei and Oxford Economics 2017, p. 24). They estimated that digitalspillovers could account for 13.1% of GDP in advanced economies.
• McKinsey estimated gains from the digital economy by examining technology-enabled cost reductions inparticular industries — for example, that electronic medical records produced a 25% reduction in avoidable
hospital readmission rates, and a 20% reduction in length of stay (Blackburn, Freeland and Gärtner 2017,p. 34) — then projecting the implications of increased digital adoption. They reported that digital technology
has ‘the potential to contribute between AU $140 billion and AU $250 billion to Australia’s GDP by 2025,
based on currently-available technology alone… [representing] an aggregate GDP increase over historical
trend of roughly 10 percent by 2025’ (Blackburn, Freeland and Gärtner 2017, p. 2,13).

7

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Figure 1.1 – Digital activities represent 6% of Australia’s total value addeda,bShare of total value added by Australian industries (at current prices and with digital
activity embedded), 2020-21c
MiningOwnership of Dwellings
Financial and Insurance Services
Health Care and Social AssistanceProfessional, Scientific and Technical Services
Construction
Digital economy
Manufacturing

Public Administration and Safety
Education and Training

Retail Trade
Transport, Postal and Warehousing
Wholesale Trade
Administrative and Support Services

Rental, Hiring and Real Estate Services
Agriculture, Forestry and Fishing
Electricity, Gas, Water and Waste Services

Information, Media and Telecommunications
Accommodation and Food Services

Other Services
Arts and Recreation Services
0

2

4

6

8

10

12

%

a. Digital activity is measured as the production of: computer hardware, software, telecommunications equipment and support
services that form and facilitate the use of computer networks; digital audio, video and advertisement broadcasting services thatcan be created, accessed, stored or viewed on digital devices; and retail and wholesale services and margins from digitallyordered or platform enabled online transactions. b. For simplicity, the measurement focused on products that were ‘primarily digital’in nature, and separately identifiable in the supply-use tables. c. The production of the digital products has not been removed fromthe existing industries for which it is partially embedded. Therefore, the shares add to more than 100% of aggregate value added.
Source: ABS (2022b).

Businesses’ use of technology and data has been increasing
The rising adoption of digital technologies reflects their direct economic benefits to businesses, but also the factthat most businesses cannot be part of the business ecosystem without digital tools. Merely achieving compliancewith tax and many other regulations requires technology and, as such, almost all businesses have access to theinternet.1 And for many businesses, a web presence is essential to reaching customers: between 2014 and 2019,the share of businesses with a web presence increased from about 49% to 55%, and the share of businesses
using e-commerce to either receive or place orders has also been rising (figure 1.2).

1 Over 95% of Australian businesses had internet access in 2016-17, of which over 99% reported using broadband

internet (ABS 2018).
8

Use of digital technology and data in the Australian economy

Data download volumes have also increased significantly over recent years. According to the ACCC’s
Internet Activity Report, 11.6 million terabytes of data were downloaded across retail broadband internet andmobile services in the June 2022 quarter, up 94% from June 2019 (figure 1.3).
Figure 1.2 – Australian businesses increasingly operate online
Share of businesses with online presence, 2014-15 to 2018-19, and using e-commerce,
2014-15 to 2019-20
60
50
40
% 30

%

20
10
0
Businesses with
web presence

2014 -15

2015 -16

Businesses withsocial media presence2016 -172017 -18

80
70
60
50
40
30
20
10
0

Businesses that placedorders via the internet

Businesses that received
orders via the internet

2018 -19

Source: ABS (Characteristics of Australian Business, 2019-20 financial year, Cat. no. 8167.0; Business Use ofInformation Technology, 2015-16 financial year, Cat. no. 8129.0; Summary of IT Use and Innovation in AustralianBusiness, 2016-17 financial year, Cat. no. 8166.0).

Figure 1.3 – Data download volumes are rapidly growing
Total volume of data downloaded for retail NBN, retail non-NBN fixed and mobile
services, June 2019 to June 2022
12

Million terabytes

10
8
6
4
2

0
June 19

Dec 19June 20

Dec 20June 21

Dec 21

June 22

Source: ACCC (2022f).

9

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

COVID-19 and working from home accelerated digital uptake
Most recently, COVID-19 has accelerated technology use as many parts of the economy have had to
conduct business online during the pandemic. This includes knowledge-based organisations transferring
their existing digital processes from office-centric to online, retailers augmenting their physical sales with
online sales, and various services being delivered digitally — for example, the COVID-19 pandemic
necessitated a more rapid transition to eHealth, including online general practitioner (GP) consultations forroutine medical services (KPMG, sub. 60, p. 14). The Australian Government’s Digital Economy Strategy
2030 highlighted that almost 9 in 10 Australian businesses adopted new technologies during COVID-19 tosupport business continuity (PMC 2021c, p. 5).
Much of this technology adoption was necessary to allow workers (about 40% of Australia’s workers) andbusinesses to operate from home (PC 2021c). The pandemic demonstrated that many jobs could be done
from home just as well as from a traditional employer-owned location — such as office-based workers andjobs where workers use computers and other portable technology, rather than working with immovablestructures, materials or equipment. Had this not been the case (that is, had the proportion of businesses andworkers able to take up digital technologies to operate online and remotely been much smaller), Australia’s
economic activity and productivity would likely have taken a greater hit as a result of COVID-19 restrictions.
According to an international analysis of workers’ digital communication patterns, during the 2020 lockdowns
the length of the average workday increased by about 8.2% relative to pre-pandemic levels, or almost 49
minutes (DeFilippis et al. 2020).
Although the long-term outcomes are unclear, the amount of work done from home is likely to remain muchhigher than it was before the pandemic. As COVID-19 restrictions have eased, hybrid work (with a portion of
the week at home and a portion at the employer’s site) has become a regular and expected part of many
workplaces. Hybrid work comes with a variety of upsides and downsides for businesses and employees(PC 2021c). In terms of digital technologies, hybrid work may increase ongoing capital expenditure on
equipment for home offices, such as laptops, headphones and software (including for videoconferencing andwebinars). Businesses may also increase their investments in digital infrastructure, its maintenance andtraining in its use, to enable remote working to continue in tandem with activity at a workplace.
As firms and workers learn more about how to effectively work from home, the productivity and wages of
those doing so are likely to improve. Those arrangements that facilitate higher productivity when working
from home and in workplaces are likely to become more prevalent through the process of innovation andlearning — via changing technology and business practices — albeit at an uncertain pace. Technologicalprogress could be combined with the lessons from experimenting with different approaches to remote work,
which would further reduce the costs of working from home. Better ways of facilitating collaboration andcreativity could be found, mitigating the downsides of working from home on productivity. In addition, digitaltechnology could give a broader range of occupations and industries the option of remote work, for all or partof their regular hours worked. More firms might move to being fully remote, but considerable momentum
would likely come from firms moving from a fully centralised to hybrid model (or increasing the levels of workfrom home within hybrid models).

Uptake of foundational versus specialised technologies
The level of technology uptake by Australian businesses varies across different types of digital and data
tools. Adoption is typically higher for technologies that are foundational and have broader uses across a
range of business applications. For example, 57% of Australian businesses reported using cloud technology

10Use of digital technology and data in the Australian economy

in the ABS’s 2019-20 Business Characteristics Survey,2 and more than one quarter of businesses reported
using cyber security software (figure 1.4).
These foundational technologies have widespread applications and are often necessary to have in place when
adopting more advanced types of digital and data tools. More specifically, cloud-based software can lead tosignificant productivity improvements in and of itself; for example, TechnologyOne submitted that ‘a transition to
consumption-based software [or cloud-based software-as-a-service] across key sectors over the next three
years could realise $224 billion in savings and uplift GDP by 1.3 percent above the base in 2030 (assuming a
2022 start date)’ (TechnologyOne, sub. 66, p. 2). On average, 54% of these gains came from productivityenhancing business process improvements and 32% from reduced technology costs.
Figure 1.4 – Technology uptake is higher for foundational tools
Share of businesses using different ICTs, 2019-20a
Cloud technology
Cybersecurity software
Customer Relationship Management software (CRM)
Electronic Data InterchangeInternet of things (IoT)
Data analytics

Enterprise Resource Planning software (ERP)
Artificial intelligence (AI)Radio Frequency Identifications (RFID)
3D Printing
Blockchain technology
0

10

20

30

40

50

60

70

%

a. This chart uses weighted estimates as published by the ABS.
Source: ABS (Characteristics of Australian Business, 2019-20 financial year, Cat. no. 8167.0).

Technologies that are relatively niche, require significant investment in equipment or labour to enableuptake, or are more complex to understand their potential benefits and use generally have lower businessadoption. To the extent that these technologies have a narrower set of economic applications at present, it
may be optimal for current take-up rates to be relatively low. These include 3D printing and blockchain,
which were each reported to be used by about 1% of Australian businesses in 2019-20 (figure 1.4). Someother tools that either generate or require large volumes of data to be used effectively, such as artificial
intelligence (AI), analytics and IoT, also had relatively low uptake.
The various factors that can lead to lower technology adoption by Australian businesses — for example cost,lack of staff capability and uncertainty about benefits — are discussed in section 2.1. In addition, theBusiness Characteristics Survey is self-reported data; therefore, its results on technology adoption partly
reflect businesses’ understanding of how they are using digital and data tools. This may be an underestimate
if businesses do not recognise that they are using some forms of technology. For example, most Australian
2 The Business Characteristics Survey is an annual survey that provides ‘estimates in business use of information

technology; innovation; and a broad range of other non-financial business characteristics’ (ABS 2021b). The 2019-20
survey captured business conditions prior to COVID-19 and also during the start of the pandemic, as parts of Australia
entered lockdown in early 2020.
11

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reportbusinesses would make use of electronic data interchanges as tax returns are submitted electronically;
however, some may not recognise this when responding to the survey. Similarly, businesses may indirectly
use AI if it is embedded in their third-party software, but may not think to report this.
Adoption of technology is not the only condition required for businesses to get productivity benefits fromdigital and data tools. To maximise value, digital investments have to be integrated into a business’s
processes and broader production model. Poorly integrated technology can lead to duplication and additionalcosts; for example, a MYOB survey of small and medium enterprises found that surveyed businesses
wasted, on average, 7 hours per week due to lack of integration, with this time spent on manual data entry,
consistency checks or fixing errors (MYOB 2022, p. 5). In some cases, the frustrated business simply ditched
its digital investment. These experiences further highlight the importance of skills, support and ease of
integration for improving processes and subsequent technology uptake.
Finding 4.2
Australian businesses are increasingly using technology
Most Australian businesses make some use of digital tools, such as having a web presence, placing
orders online and adopting cloud technology. COVID-19 accelerated technology use, with manybusinesses shifting to online sales or digitally delivered services. Technology adoption is highest forfoundational tools such as cloud technology and cyber security software. To the extent that sometechnologies (such as 3D printing and blockchain) may have a narrower set of economic applications, it
could be optimal for take-up rates to be relatively low at present.

Different adoption rates likely reflect heterogenous benefits and costs
There is variation in adoption rates for each type of technology, depending on business characteristics. As
discussed above, heterogenous uptake of digital and data tools is to be expected because businesses ofdifferent sizes and industries are likely to derive different benefits and costs from using a specific technology.
This in turn affects how quickly or slowly a given technology diffuses across Australian businesses which,given the evidence suggesting a positive relationship between technology adoption and productivity(box 1.2), could affect the dispersion of business performance across the economy. The Commission foundthat, holding all other characteristics constant:3• larger businesses were significantly more likely than smaller businesses to have adopted digital and data
tools across almost all surveyed technologies, with uptake being highest among the largest businesses
with 200 or more employees. Consistent with this, the Australian Small Business and Family Enterprise
Ombudsman has stated that ‘small business managers are not always as supportive of technology
adoption compared to larger businesses’ (ASBFEO, sub. 64, p. 3)

3 To understand the business characteristics driving differences in technology adoption, the Commission has undertaken

regression analysis using the ABS’s Business Characteristics Survey data. Logistic regressions were estimated to
identify which characteristics were relatively more important for explaining digital and data uptake across the 11
technologies that businesses were surveyed about in 2019-20. The variations reported here are for characteristics
estimated to be statistically significant at the 5% level, holding all other characteristics constant (for example, the resultson varying location are after controlling for business size and industry). Further details about the regression specification
and results tables are provided in appendix A.
12

Use of digital technology and data in the Australian economy• businesses in regional and remote Australia were significantly less likely than businesses located in cities
to use customer relationship management and enterprise resource planning software. However, businesslocation generally had limited explanatory power in affecting other types of technology uptake• there were many statistically significant variations in how businesses across different industries adopted
different technologies.
Businesses in knowledge services and information media and telecommunications were more likely to use
cloud technology, with over 60% adoption by businesses within these industries in 2019-20 (figure 1.5). These
industries are relatively knowledge intensive and require use of digital tools and computing power to produce
outputs, and are therefore well-placed to benefit from using cloud technology. At the same time, even inindustries with relatively lower cloud uptake, the adoption rate, in absolute terms, is still substantial — about
40% of businesses in construction and customer services use cloud technology.
This likely reflects the broader benefits of cloud technology as it has many basic applications that are
relevant for all industries, such as storing and accessing information, as well as more complex uses that may
be more relevant for knowledge-intensive industries, such as to access more processing power and enable
the use of other technologies such as AI or data analytics. Previous research has found that a higher
proportion of businesses adopt cloud technology for basic uses, such as software applications and data
storage, reflecting the early stage of adoption by many businesses — but that cloud services will also have afoundational role in enabling next wave technologies (DAE 2019b, p. 4).
Consistent with this, industries with higher uptake of cloud technology also had higher adoption of AI.
Businesses in the knowledge services and information media and telecommunications industries were more
likely to be using AI, with adoption rates of more than 10% in 2019-20 (figure 1.5). Businesses that havebeen early adopters of AI are likely to have been those that stand to gain significant benefits from their use.
A 2019 industry survey found that 56% of AI early adopters in Australia believe AI is very or criticallyimportant to their company’s success now, and 79% believe this will be the case within two years (Deloitte
Insights 2019, p. 8,10).
Figure 1.5 – Cloud and AI have higher adoption in knowledge-intensive industries
Share of businesses using selected technologies by industry, 2019-20a,b,c
Cloud technology

Artificial Intelligence

Knowledge Services

Knowledge Services

Information Media andTelecommunications

Information Media andTelecommunications

Other Services

Electricity, Water andWaste Services

Manufacturing

Manufacturing

Electricity, Water andWaste Services

Supply Chain Logistics

Supply Chain Logistics

Other Services

Primary Industries
Customer Services

Primary Industries

Construction

Customer Services
0

20

40
%

60

80

0

5

10

15

%

13

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reporta. Some ANZSIC 2006 divisions have been grouped for this analysis. ‘Customer services’ includes retail trade;accommodation and food services; and other services. ‘Knowledge services’ includes finance and insurance services; andprofessional, scientific and technical services. ‘Other services’ includes administrative and support services; healthcare andsocial assistance; arts and recreation services; and rental, hiring and real estate services. ‘Primary industries’ includes
agriculture, forestry and fishing; and mining. ‘Supply chain logistics’ includes wholesale trade; and transport, postal andwarehousing. The Business Characteristics Survey does not capture businesses in the Education and Training and Public
Administration and Safety industries. b. These results are unweighted so are not directly comparable with the weighted
estimates in figure 1.4. c. Construction industry adoption of AI unable to be reported due to sample size constraints.
Source: Productivity Commission estimates using data in the ABS’s Business Longitudinal Analysis Data Environment.

Knowledge services businesses were also the most likely out of all industries to adopt customer relationshipmanagement (CRM) and cyber security software in 2019-20 (figure 1.6). Use of these digital tools bybusinesses in other industries varied substantially, potentially reflecting the complexity of their customer
interactions (for CRM software) and their vulnerability to or awareness of cyber security risks (for cybersecurity software). However, some businesses may be underinvesting in cyber security due tounderestimating the likelihood or total costs of a security breach, as discussed in section 2.2.
Figure 1.6 – Knowledge services businesses are the largest adopters of CRM andsecurity software
Share of businesses using CRM and cybersecurity software by industry, 2019-20a,b
Customer Relationship Management software

Cybersecurity software

Knowledge Services

Knowledge Services

Other Services

Manufacturing

Information Media andTelecommunications

Other Services

Manufacturing

Supply Chain Logistics

Electricity, Water andWaste Services

Electricity, Water andWaste Services
Information Media andTelecommunications

Customer Services

Primary Industries

Construction

Customer Services

Primary Industries

Construction

Supply Chain Logistics

0

10

20
%

30

40

50

0

10

20

30

40

50

%

a. Some ANZSIC 2006 divisions have been grouped for this analysis. ‘Customer services’ includes retail trade;accommodation and food services; and other services. ‘Knowledge services’ includes finance and insurance services;and professional, scientific and technical services. ‘Other services’ includes administrative and support services;
healthcare and social assistance; arts and recreation services; and rental, hiring and real estate services. ‘Primaryindustries’ includes agriculture, forestry and fishing; and mining. ‘Supply chain logistics’ includes wholesale trade; andtransport, postal and warehousing. The Business Characteristics Survey does not capture businesses in the Education
and Training and Public Administration and Safety industries. b. These results are unweighted so are not directlycomparable with the weighted estimates in figure 1.4.
Source: Productivity Commission estimates using data in the ABS’s Business Longitudinal Analysis Data Environment.

14

Use of digital technology and data in the Australian economy

Businesses in the manufacturing, supply chain logistics and primary industries were more likely than others
to use radio frequency identification (RFID) tags (figure 1.7). Higher adoption in these industries is likely toreflect the relatively greater gains to these businesses from using RFID tags to automatically identify andtrack objects. As discussed above, industries that make greater use of equipment — or have more
requirements to physically move inputs and outputs as part of their production processes — are better
placed to benefit from the cost reductions associated with this type of technology. There is significant
potential for economic gain; for example, according to the Minerals Council of Australia, ‘adoption of digitaland technological innovation has the potential to deliver significant productivity improvements of up to 23%
to the Australian mining industry by 2030’ (MCA, sub. 55, p. 17).
Supply chain logistics and manufacturing businesses also have relatively higher uptake of electronic datainterchange (EDI) tools, an established technology that includes real-time computer-to-computer exchangeof transaction data such as invoices and purchase orders (figure 1.7). This is consistent with EDI enabling
more efficient tracking of inputs and suppliers, and outputs and customers, which is particularly valuable forindustries with complex production workflows and linkages, so they can lower costs and optimise decision
making across their systems and processes (Min 2000).
Figure 1.7 – Manufacturing and supply chain logistics industries have the highest
adoption of RFID tags and EDI tools
Share of businesses using RFID tags and EDI by industry, 2019-20a,bRadio Frequency Identification tags

Electronic Data Interchange

Manufacturing

Supply Chain Logistics

Supply Chain Logistics

Manufacturing

Primary Industries

Customer Services

Electricity, Water andWaste Services

Electricity, Water andWaste Services

Other Services

Knowledge Services

Customer Services

Other Services

Knowledge Services

Information Media andTelecommunications

Information Media andTelecommunications

Construction

Construction

Primary Industries

0

5

10
%

15

0

10

20

30

40

%

a. Some ANZSIC 2006 divisions have been grouped for this analysis. ‘Customer services’ includes retail trade; accommodationand food services; and other services. ‘Knowledge services’ includes finance and insurance services; and professional,
scientific and technical services. ‘Other services’ includes administrative and support services; healthcare and social
assistance; arts and recreation services; and rental, hiring and real estate services. ‘Primary industries’ includes agriculture,
forestry and fishing; and mining. ‘Supply chain logistics’ includes wholesale trade; and transport, postal and warehousing. The
Business Characteristics Survey does not capture businesses in the Education and Training and Public Administration and
Safety industries. b. These results are unweighted so are not directly comparable with the weighted estimates in figure 1.4.
c. Electricity, Water and Waste Services. d. Information Media and Telecommunications.
Source: Productivity Commission estimates using data in the ABS’s Business Longitudinal Analysis Data Environment.

15

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Finding 4.3
Businesses in different industries adopt different digital tools
Variation in businesses’ adoption of digital and data tools likely reflects differences in expected benefits andcosts from adoption. For example, knowledge-intensive industries are more likely to use cyber security
software and artificial intelligence, while manufacturing and supply chain logistics industries are more likely to
use radio frequency identification and electronic data interchange tools. This could explain variation in the rates
of technology diffusion across the economy and may affect dispersion in business performance.

1.2

International comparisons on technology and data use

Australia’s internet coverage is high, but speeds are relatively low
Individual and business access to the internet is a useful starting point to understanding how Australia
compares to other countries on digital and data use, as internet connectivity underpins most othertechnologies and their potential productivity benefits. Australian businesses are well connected to theinternet relative to other OECD countries, with about 99% of Australian businesses having a broadband
connection (either fixed or mobile) in 2020 (figure 1.8).
Figure 1.8 – Almost all Australian businesses have broadband internet connections
Share of businesses with a broadband connection (includes fixed and wireless), 2020
100
90
80
70
60

%

50
40
30
20
10

0

Source: OECD (2022b).

However, Australia’s internet speeds are lower than many other OECD countries, particularly for fixed
broadband connections. The majority of fixed broadband subscriptions in Australia are between 25/30
megabits per second (Mbps) and 100 Mbps (figure 1.9). Other countries — such as Switzerland, Korea andthe United States — have a much higher proportion of fixed broadband subscriptions with speeds of 100
Mbps or higher. Moreover, speed test data shows that Australia’s actual internet speeds are not globally16

Use of digital technology and data in the Australian economy

competitive. In the year to January 2022, Speedtest by Ookla reported that Australia’s median mobileinternet download speed was 68.35 Mbps (ranking 18th in the world) and the median fixed broadband
download speed was 50.89 Mbps (ranking 61st) (Ookla Speedtest 2022).4
Figure 1.9 – Australia has many middling speed connections
Fixed broadband subscriptions per 100 inhabitants by download speed tiers, June 2021
50
45

40
35
30
25
20
15
10
5

Switzerland
FranceNorwayDenmark
Germany
Korea
Netherlands
CanadaBelgium
Portugal
United Kingdom
SwedenGreeceIceland
Luxembourg
United States
Czech Republic
New ZealandAustralia
EstoniaJapan
Spain
HungaryOECD
Finland
Slovak Republic
Slovenia
Ireland
Italy
Austria
Lithuania
IsraelLatviaPolandChile
TurkeyCosta Rica
MexicoColombia

0<25/30Mbps≥25/30Mbps; <100Mbps≥ 1000Mbps

Breakdown not available≥ 100Mbps; <1000Mbps

Source: OECD (2022a).

Australia’s large number of 25–100 Mbps subscriptions could reflect digital infrastructure (discussed in
section 3.1) and broadband pricing, as many internet users may have a connection that could accommodatea faster subscription but choose to purchase a lower speed plan. Previous research has found that Australia
ranks fourth out of 13 OECD countries on broadband affordability (measured using median price as a shareof per capita income) for the 26–50 Mbps speed tier, but sixth for the 51–100 Mbps tier — below France,
Japan, South Korea, Germany and the United States (Accenture 2021, p. 15). However, the report did not
examine pricing and affordability for speeds higher than 100 Mbps.
Whether or not Australia’s broadband speeds provide an adequate baseline of connectivity for businesses
depends on what businesses need their internet connections for and what emerging technology this enables
businesses to adopt, now and in the future. For example, speeds of greater than 100 Mbps increase the

4 Speed test rankings from an individual source must be interpreted with caution, because they are based on theselected sample of internet users that perform speed checks with that source (AlphaBeta 2019b). The OECD reports that
Australia has consistently low fixed broadband download speeds across several different sources, including Ookla,
M-Lab and Steam (OECD 2022a).
175-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

capacity of businesses to use cloud services and host multiple servers (Francom 2020), implying that lower
speeds may constrain the uptake of these services. Internet speeds will also affect how many devices canbe connected to a network (Antonelli 2022), suggesting that uptake of IoT devices may also be curtailed if
the average speeds of Australian internet are insufficient.
Notwithstanding these relatively lower speeds — and perhaps in part driven by relatively high internet
coverage — Australian businesses have higher rates of cloud technology adoption than many othercountries. The share of businesses using cloud technology in Australia is third in the OECD, with 71% ofbusinesses purchasing cloud computing services (figure 1.10). Evidence suggests that Australia’s
comparatively high uptake of cloud technology has persisted for some time, with earlier research finding that
Australia had the second highest per-capita cloud computing expenditure in 2015, at US$371.50 (second
only to Singapore, which had expenditure of US$539) (Gutierrez, Boukrami and Lumsden 2015).
Figure 1.10 – Australian businesses do relatively well on cloud adoptiona,bShare of businesses purchasing cloud computing services by firm size, 2021
100
90
80
70

60
%

50
40
30
20
10

All

MediumTurkeyGreeceCanadaHungary

LatviaPolandSpain

FranceLithuania

Luxembourg

Portugal

Slovak Republic

Austria

Germany

Slovenia

Switzerland

IsraelSmall

Czech Republic

Belgium

United Kingdom

Ireland

Estonia

Italy

NorwayJapan

Denmark

Australia

Netherlands

FinlandSweden0

Large

a. Australian data refers to the fiscal year ending 30 June 2020 instead of 2021. b. For Israel and United Kingdom, data
refer to 2020 instead of 2021. For Canada, Japan and Switzerland data refer to 2019 instead of 2021. For Japan, data
refer to businesses with 100 or more employees instead of 10 or more; medium-sized enterprises have 100-299
employees and large ones 300 or more.
Source: OECD (2022a).

18

Use of digital technology and data in the Australian economy

Data consumption is high but use of data-driven technologies is low
The production, sharing, analysis and use of data can significantly improve economic outcomes (asdiscussed in section 2.2) and Australia performs relatively well as both a data producer and consumer. For
example, in 2019 the Harvard Business Review ranked Australia as 9th in the world on a list of ‘new’ data
producers, based on our internet use and accessibility scores (Chakravorti, Bhalla and Chaturvedi 2019).
Australia is also a comparatively large consumer of data, with per-capita download volumes similar tocountries such as Singapore, New Zealand, South Korea and Sweden (figure 1.11).
Figure 1.11 – Australia’s data download volumes are relatively highFixed broadband data consumption, 2019

Gigabytes per capita per month

140
120
100
80
60
40
20
0

Source: Ofcom (2022).

These significant data volumes suggest that Australia has a lot of potential to leverage data-driven
technologies, such as AI and data analytics (box 1.1), for productivity gains. However, adoption of thesetechnologies is currently low compared with other countries. Only 6% of Australian businesses were using
data analytics (such as working with big data or geospatial technology) in 2019-20 and an even lower share
were using AI — in both cases, Australia’s adoption is low compared with other countries in the OECD(figure 1.12). Some other studies have suggested that Australia performs relatively well in AI; for example,
Zhang et al. (2021) ranked Australia at 8th in the world in 2020. However, this high ranking is partly due toAustralia’s performance in AI research (such as journal citations and publications), which does notnecessarily translate to more use of AI by businesses.

195-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Figure 1.12 – Australian businesses are trailing in use of data-driven technologies
Share of businesses who use data analytics, 2019a, and artificial intelligence, 2020
Data analytics

Artificial Intelligence

Netherlands
Denmark
United Kingdom
Belgium
IrelandFranceFinlandSwedenNorwayLuxembourg
Germany
GreecePortugal
Lithuania
Estonia
Czech Republic
Spain
TurkeyAustria
Italy
LatviaPolandKorea
Hungary
Slovenia
Australia
Slovak Republic
IsraelCanadaIrelandFinlandDenmark
Portugal
Italy
Spain
Lithuania
SwedenSlovak Republic
Germany
TurkeyCzech Republic
Belgium
NorwayLuxembourg
FranceEstonia
Netherlands
PolandUnited Kingdom
Austria
IsraelAustralia
Hungary
Slovenia
Latvia

0

10

20
%

30

0

10

20

30

%

a. While international data on data analytics use in 2019 has been sourced from the OECD, the share of Australianbusinesses using data analytics is from the ABS for 2019-20 (figure 1.4). The OECD’s statistics do not include Australia
in the cross-country comparison on use of data analytics.
Source: ABS (Characteristics of Australian Business 2019-20 financial year, cat. No. 8167.0), OECD (2022b, 2022a).

Finding 4.4
Australia trails behind other countries in more advanced uses of technology
Australia performs well compared with other developed economies on foundations such as internet
connections and data volumes. But we trail in some more advanced indicators such as internet speeds
and use of data-driven technologies.

20

Potential barriers to adopting new technologies and data

2.

Potential barriers to adopting
new technologies and data

Key points
Although many businesses are adopting digital tools to improve their productivity, there are somebarriers slowing the adoption of new uses of technology and data across the economy.
The most common barriers to technology and data adoption identified by Australian businesses are
inadequate internet, lack of skills, limited awareness and uncertainty about benefits, cost and legacy
systems.
• Agriculture businesses are most likely to cite unsuitable internet speed and geographic location as barriers,suggesting poor digital connectivity in regional and remote areas could be limiting adoption.
• High costs are more frequently identified as a barrier by medium and large businesses, which could reflect
the costs associated with transitioning from legacy systems and established processes towards newtechnologies and ways of working.
More broadly, unique features of the digital and data environment could hinder adoption. For instance,
without clear rules about access and rights, data is likely to be underutilised as potential users could be
excluded. Businesses are also likely to underinvest in cyber security because the costs of cyber attacks
to an individual business are often less than the costs of such attacks to society more broadly.

2.1

Business-level barriers to digital and data uptake

In deciding whether to adopt digital technology and new uses of data, Australian businesses weigh up thesignificant benefits (outlined in section 1.1) against the costs of adoption and barriers that may be preventing
uptake. Businesses report that in 2019-20, the top factors that limited their use of technology were
inadequate internet speeds, lack of skills and knowledge in the business, and cost or benefit uncertainties(figure 2.1). Various other studies of businesses in Australia and around the world have found similar barriers
to adoption.
• Certified Practising Accountants Australia’s survey of over 700 businesses in Australia, China, Hong
Kong, Macau, Malaysia and Singapore found that the top technology adoption challenges are ‘financial
constraints’, ‘shortage of technology talent’ and ‘complex legacy systems’ (CPA Australia 2021, p. 22).
• Deloitte Access Economics’ survey of about 500 Australian small businesses reported that the mainbarrier to digital engagement is costs, followed by issues relating to awareness and decision making (forexample, businesses believing that digital and data are not relevant to their business or simply not having
thought about their use) (DAE 2019a, p. 11).
21

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report• Xero’s research on behavioural barriers to adoption surveyed more than 4200 small businesses inAustralia, New Zealand, Singapore, the United States, the United Kingdom and Canada, and found the
top issues were resistance to change and uncertainty (Xero 2021a, p. 13).
Figure 2.1 – Internet speed and lack of skills are the biggest barriers to adoption
Share of businesses citing each factor as limiting their use of ICTs, 2019-20a
Unsuitable internet speed
Lack of skilled persons within the business

Insufficient knowledge of ICTs
Uncertainty around cost/benefit
Cost of implementation too highLack of access to additional funds

Geographical location
ICT failure
Speed of technological change
Legal issues and risk

Lack of skilled persons within the labour market
0

2

4

6

8

10

12

14

%

a. This chart uses weighted estimates as published by the ABS in its Characteristics of Australian Business 2019-20 publication.
Source: ABS (Characteristics of Australian Business, 2019-20 financial year, Cat. no. 8167.0).

The specific nature of these barriers varies from business to business. Issues about cost, for instance, could
relate to upfront costs of upgrading systems and processes, as well as ongoing costs related to new uses oftechnology and data. This financial equation is changing as many of these new applications are accessed
via software-as-a-service models rather than through on-premise software and servers — TechnologyOne,
which provides both types of products, estimates that ‘moving to a SaaS approach can lower IT costs by up
to 30%’ (TechnologyOne 2019, p. 3).
However, businesses that are transitioning from legacy systems must also factor in the costs of changing
processes and training staff to work with new digital tools. These represent additional sources of cost anduncertainty and can affect businesses of all sizes. Smaller businesses may not have the time or resources tonavigate significant change; for example, Xero has observed that Australian small businesses are ‘stuck in a
“wait and see” mode with new technology – they’re reasonably excited about its potential, but not so muchso that they’ll step into uncharted waters’ (Xero 2021a, p. 26). Meanwhile, larger businesses may have more
substantive legacy systems that need to be updated, and implementing significant changes to what could belong-established processes requires large amounts of time and investment (discussed below).
Lack of skills and talent can also manifest as a barrier in different ways across different businesses. In somecases, this relates to the specialist knowledge and capabilities of workers that need to use technology anddata in their roles. Research by Gartner has found that talent availability inhibits technology adoption acrossa range of digital and data domains — including automation, security and digital workplaces — and that skills
challenges have become more prominent since 2020 (Gartner 2021). Australian workers’ digital anddata-related skills are discussed in further detail in section 3.3.

22

Potential barriers to adopting new technologies and data

In other cases, adoption of innovative uses of technology and data is hindered by the capabilities of seniorleadership. For example, a survey of 1300 executives in businesses from Australia, China, France,
Germany, Japan, the United States and the United Kingdom found that ‘while 81% of the executives agree
that data skills are required to become a senior leader in their companies, 67% say they are not comfortable
accessing or using data themselves’ (Davenport and Mittal 2020). Limited skills could mean that seniorleadership is unaware of the potential benefits of adopting digital and data tools, and as strategic decisions
are often made at this senior level, this lack of relevant skills could slow business uptake.
The barriers that Australian businesses face in adopting technology and data vary depending on businesscharacteristics. For example, in 2019-20 (ABS 2021a):• unsuitable internet speed was a particular problem in the agriculture, forestry and fishing industry — 28% ofagriculture businesses identified this as a barrier, almost double the rate of the next-highest industry (retailtrade, 16%). In addition, 22% of agriculture businesses stated that geographic location limited their technology
use, which was also double that of the next-highest industry (mining, 11%). As agriculture businesses primarily
operate in regional and remote Australia, this indicates that internet connectivity and digital infrastructure could bea barrier to productivity-enhancing technology adoption in these locations• high implementation costs were more likely to be identified as a factor limiting technology uptake bymedium businesses (17% of businesses employing 20 to 199 persons) and large businesses (15% ofbusinesses employing 200 or more persons), rather than small businesses. As discussed above,transitioning from legacy systems to new technologies can involve significant costs, and medium and large
businesses are more likely to have established processes that are costly to change and therefore present
larger barriers to adoption• the most frequently cited skills barriers — lack of skilled persons in the business and insufficientknowledge of ICTs — were more likely to be identified as limiting factors by small and medium
businesses, and particularly businesses employing 5 to 19 persons (figure 2.2).
Figure 2.2 – Small businesses are more likely than micro, medium and large businesses
to face skills barriers to adoption
Share of businesses citing skills factors as limiting their use of ICTs by business size,
2019-20a

200 or more persons

20–199 persons

5–19 persons

0–4 persons
0

2

4

6

Lack of skilled persons within the business

8
%

10

12

14

16

Insufficient knowledge of ICTs

a. This chart uses weighted estimates as published by the ABS in its Characteristics of Australian Business 2019-20 publication.
Source: ABS (Characteristics of Australian Business, 2019-20 financial year, Cat. no. 8167.0).

23

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Finding 4.5
There are various barriers to business adoption of technology
Australian businesses report challenges to adopting digital and data tools that include: inadequate
internet, lack of skills, limited awareness and uncertainty about benefits and costs, and legacy systems.
Inadequate internet connectivity and speed are particular issues in the agriculture industry, while skills
barriers are more likely to be identified by smaller businesses.

2.2

Broader limitations in the digital and data
environment

Beyond the barriers to adoption experienced by individual businesses, there are broader issues that are
unique to data and digital use that could limit uptake of productivity-enhancing technologies and processes.
These include complexities in how data is created, used and shared; and the potential for underinvestment incyber security to jeopardise the economic gains from greater use of technology and data.

Excessive exclusions to data use weakens its value
Improving data use benefits the economy through several channels
The near-endless possible uses of data means its potential value can vary between data users andapplications, as well as over time. There have been some efforts to quantify the value of existing data basedon the costs of producing that data.5 Income- and market-based valuation approaches are also sometimes
used, though in many cases the income streams attributable to a dataset are not easily identified or
predicted, and few market prices are observed for data (Coyle and Manley 2022, pp. 8–9). The OECDobserves that ‘access to data alone does not generate value — rather, the value from data is derived in its
use and after it has been collected, organised, and acted upon. …Therefore, the value of data is difficult toquantify, as data that is not valuable today may become so tomorrow’ (Jouanjean et al. 2020, p. 13).
Deriving value from collecting, organising and acting upon data creates opportunities for productivity gains.
The Commission’s 2017 Data Availability and Use inquiry detailed the breadth of potential benefits
associated with more access and use of data, as they relate to individuals, businesses and society(PC 2017a, ch. 2). The channels that are most relevant for enhancing productivity include:• more competition — data allows consumers to make better comparisons on the price and quality ofdifferent goods and services, particularly for complex products such as in financial services or healthcare.
This enables consumers to make more informed decisions about the products they purchase, providing
greater impetus for businesses (and governments) to compete either on price or product features

5 For example, Statistics Canada has estimated the value of data based on ‘the labour costs incurred in their production

plus associated non-direct labour and other costs, such as the costs of the associated human resource management andfinancial control, electricity, building maintenance and telecommunications services’ (Statistics Canada 2019). The ABS
has applied this sum-of-costs approach to Australia, finding that ‘valuing data as an asset within the national accounts
may increase GDP in the order of 2% and would have little impact on the value of capital stock (dependent on the asset
life chosen)’ (Smedes, Nguyen and Tenburren 2022, p. 10).
24

Potential barriers to adopting new technologies and data

• fuelling innovation — businesses and governments can use data as the basis for new goods and services
or incremental improvements to existing ones, as it furthers their understanding of what does and does notwork. The data may also be a direct input to the new or improved product, such as when the product relies
on an algorithm for part of its decision making• improving allocative efficiency — data enables resources to be allocated more efficiently by both theprivate and public sectors. At a micro level, individual inputs (such as energy or worker time) can bemonitored and shifted to higher-value uses as required. From a macro perspective, data can be used to
identify parts of a system (such as the hospital system) that are over or under capacity, and resources canthen be directed accordingly• targeting government interventions — data can enable governments to better target their interventions in
the economy to achieve social and community outcomes, such as public health and safety, income
support for people in hardship or environmental improvements.
While these economic opportunities relate to data itself regardless of whether or not the data is digitised, inpractice many benefits are realised at scale when digital technologies are used to collect and analyse data,
due to the significant lowering of transaction costs (section 1.1).
The ability for data to be used for productivity gains can vary over time. For example, in some cases thevalue that can be created from using data to improve a product diminishes as more data is collected andanalysed — the information contained in the purchases of the first 1000 customers is likely to be more usefulthan data from the 1 000 001st to 1 001 000th customers a year later. Data can also become obsolete overtime; for instance, data from a couple of months ago has lower value for informing resource allocation now,
compared with making similar decisions at the time the data was collected. Alternatively, new digitaltechnologies may open up value from previously underutilised datasets.
Moreover, the economic benefits associated with the above opportunities sometimes stem frominterdependencies in how data is valued and used by different stakeholders. For example, a consumer getsvalue from data on their previous purchase decisions because it can help to inform their preferences whenbuying related goods and services in the future. Because of this, businesses selling similar products canmake use of this preference data to improve their offerings and therefore their competitiveness relative toother sellers. These interdependencies mean that maximising the productivity gains associated with using
data may require data linkage between multiple sources or stakeholders, as well as analytic capabilities toextract useful insights (OECD 2015, p. 186).

Making data available in private and public contexts
Given the potential economic benefits, making data widely available for businesses and governments to use
could generate significant productivity gains. However, as discussed in section 1.1, external parties can be
excluded from accessing and using data, even though its use in the production process is non-rivalrous.
While this excludability provides a mechanism for incentivising data production and collection, it also
prevents others from using the data to create new economic value. In this context, restrictions placed ondata access are conceptually similar to intellectual property, where there is also a trade-off between broader
access to something and its exclusive use, with this balance often struck by granting content creators25

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

exclusive intellectual property rights for a limited time.6 However, such time-based, temporary rights overdata generally have not been developed in Australia or elsewhere.
A private business that controls data may find it profit maximising to exclude other parties from that data. For
example, it has been claimed that control of customer data enables digital platforms to create barriers toentry by rival businesses and to limit competition, particularly in search and advertising technology services(ACCC 2022d, pp. 166–167). Nonetheless, private organisations may share data on their own accord if there
are mutual benefits and regulatory requirements such as privacy laws and commercial contract conditions
are adhered to. Research by the European Commission noted that where there are gains for multiple private
parties, even if there is no overarching framework requiring data sharing, ‘bargaining in data markets
produces a de facto ownership or residual rights allocation, both in commercial [business-to-business] and inpersonal [business-to-consumer] data settings’ (Duch-Brown, Martens and Mueller-Langer 2017, p. 46). For
example, advanced manufacturing businesses have generated efficiency improvements through privateagreements to share real-time engineering data with their suppliers, which enables faster product design,
more flexible operations and better cost management (ODI 2020, p. 2).
But as the non-rivalrous nature of data means that it can be very widely used across the economy, it is likelythat these private market-based solutions would not result in a socially optimal allocation of data. The OECD
has observed that ‘greater social value is created with greater use of common resources [as] in the case of
non-rivalrous goods such as data. This is the strongest rationale for policy makers to promote access todata’ (OECD 2015, p. 38). There are various mechanisms that governments can use to reduce the capacityof private entities to undesirably exclude others from accessing data, such as by implementing a frameworkthat establishes rights over data and requires that data is shared if requested by someone with a right over it.
An example of this is Australia’s Consumer Data Right, discussed in further detail in section 3.2.
Because excludability sometimes provides the incentive for private organisations to invest in collecting,cleaning and storing data for their own uses (section 1.1), government requirements compelling theseorganisations to share their data could erode some of the private economic benefits that they realise from theirinvestment and/or reduce the quality of data available. In some cases, individuals may be less accepting of
making their data available to a private organisation if they know that the organisation is compelled, in turn, toshare that data with a third party. Efforts to increase data sharing to enable more or higher value uses of
non-rivalrous data must therefore be balanced against the risks of disincentivising future data production (aswell as taking into consideration privacy and data security concerns). Governments also face challenges in
specifying the optimal level of access ‘because it is difficult to know ex-ante what the social welfare maximizing
arrangement would be, [so] regulators may have little guidance for an intervention’ (Duch-Brown, Martens andMueller-Langer 2017, p. 47).
The socially optimal amount of data availability varies based on the private or public nature of the benefits
and costs associated with its use. It can also depend on whether private or public sector entities are involvedin collecting and holding the data. Data can be produced purely by the public sector, purely by the private
sector or somewhere in between these two ends of the spectrum (for example, jointly produced by public
and private entities or collected and held by private businesses but funded by government). The role ofgovernment varies in these scenarios — section 3.2 explores different ways that government can support
data sharing and use in different contexts.

6 The Commission previously examined intellectual property rights in its 2016 Intellectual Property Arrangements inquiry.

In highlighting the trade-off between production and use, the inquiry stated that intellectual property rights should aim toprovide ‘appropriate incentives for innovation, investment and the production of creative works while ensuring it does notunreasonably impede further innovation, competition, investment and access to goods and services’ (PC 2016, p. 6).
26

Potential barriers to adopting new technologies and data

Finding 4.6
Data sharing enables productivity growth but can reduce incentives to invest in data
More access to and better use of data enables productivity growth by increasing competition, innovation
and allocative efficiency. But efforts to increase data sharing could discourage quality future data
production if they erode the economic benefits that private organisations can realise from investing in datacollection and analysis. As such, increased data access must be balanced alongside incentives for theongoing collection and maintenance of quality data, as well as privacy and data security concerns.

Businesses are likely to be underinvesting in cyber security
Poor cyber security jeopardises economic gains
As the use of technologies and data has spread throughout the Australian economy, so too have the risks
that attacks on the digital systems and networks that underpin these activities can directly affect economic
prosperity. There are multiple sources of risks and points of vulnerability; for example, unprotected softwareand hardware and human error.
The number of cyber crime incidents is growing in Australia, with cyber crime reports to the Australian Cyber
Security Centre (ACSC) increasing to 76 000 incidents in 2021-22, up 13% on the previous financial year
(ACSC 2022a, p. 11). In 2021-22, the most common type of cyber crime reported was fraud, representing
27% of all reports (figure 2.3), while many of the shopping and online banking incidents were scams
involving loss of finances or personal information. Online scams not only harm consumers but cansignificantly reduce businesses’ confidence in digitising or adopting new technologies, with the ACCC
observing that it can be very difficult to repair the damage inflicted by scams after they have occurred(ACCC 2021e, p. 2). About 450 ransomware attacks were reported in 2021-22; while low in number, the
ACSC noted that it is likely ransomware is significantly underreported, ‘especially by victims who choose to
pay a ransom’ (ACSC 2022a, p. 47).
Most cyber security incidents are self reported in Australia, so the true magnitude of cyber crime is unknown.
However, international analysis on the extent of cyber breaches undertaken by global cyber security
software providers indicates that Australian businesses receive a large share of cyber attacks. For example,
Australia was the third-most targeted country based on ransomware intrusion volumes in 2021, behind theUnited States and Italy (Accenture 2022, p. 5), and a 2020 survey found that Australia had the highest
percentage of firms reporting a ransomware attack in the previous 12 months (CyberEdge 2021, p. 23).
Cyber security is an important pre-condition for effective use of digital technology and data, and poor security
practices can limit productivity and economic gains in several ways.7 First, concerns about security risks canprevent uptake of digital tools and data analysis. For instance, concerns about security and lack of trust inservice providers are a barrier to cloud adoption (Alismaili et al. 2020), with 10% of Australian businesses
citing security concerns as a reason for not adopting cloud technology (ABS 2021a). Conversely, providing

7 The Australian Government differentiates between cyber security — which involves ‘protecting data, information,

devices and networks from malicious actors’ — and online safety, or protection from ‘harmful content and behaviours
such as cyber bulling, image-based abuse and illegal and harmful online content’ (Home Affairs 2020a, p. 35). This
report focuses on cyber security rather than online safety, as it is the main factor that could affect productivity.
27

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reportassurance and confidence in digital and data systems and processes, and minimising the risks involved, cansupport adoption.8
Figure 2.3 – Fraud is the most common cyber crime reported in Australia
Cyber crime reports made to the ACSC by crime type, 2021-22a
Fraud
Other
Shopping
Online banking
Investment
Business email compromise
Selling
Bulk extortion
Romance scams
0

5

10

15
%

20

25

30

a. The ‘other’ category includes crimes such as harassment and malware.
Source: ACSC (2022a, p. 23).

Second, cyber security incidents can also have significant economic consequences in terms of lost output or
productivity. In Australia, the ACSC stated that self-reported losses from cyber crime totalled more than A$33
billion in 2020-21 (ACSC 2021a, p. 17) and worldwide, the Centre for Strategic and International Studies
estimated that in 2020 the cost of cyber crime to the global economy was US$945 billion (Smith, Lostri and
Lewis 2020, p. 3). The impact on an individual business can be significant; for example:• the average cost of a data breach to Australian businesses was estimated to be US$2.8 million in 2021,
when taking into account the direct and indirect costs of ‘detection and escalation, notification, post breach
response and lost business’ (IBM 2021, p. 9)• 60% of all targeted cyber attacks strike small and medium businesses, and the average time to resolve anattack is 23 days — though this more than doubles to 51 days if the attack stemmed from a malicious
insider, employee or contractor (Australian Government 2015)• two-thirds of small and medium businesses would have to shut down for at least a day, and potentially goout of business, if they were hit with a data breach (Forrest 2017).

While security expenditure is increasing, not all risks and costs are considered
Australians are already increasingly investing in cyber security to protect themselves from the costs of cyberattacks and breaches. AustCyber estimates that Australia’s total cyber security expenditure was $5.6 billion in
2020, having increased at an average annual rate of 9% between 2017 and 2020 (AustCyber 2020, p. 8).
Providers of cyber security products and services earn about 30% of their revenue from sales to government
customers (including in the healthcare, social care, education and defence sectors) and up to 25% from financial

8 But there is also often a trade-off between security of data and access to (and hence efficient use of) data, implying that

there is an optimal level of insecurity (Moore 2010, p. 106).
28

Potential barriers to adopting new technologies and dataservices customers (AustCyber 2020, p. 19). However, this only reflects expenditure on external cyber security
products and services — businesses in some sectors, such as technology and financial services, are reportedly
building internal cyber capabilities rather than purchasing from external providers (AustCyber 2020, p. 19).
International estimates suggest that Australian businesses have a comparatively low share of IT expenditure
dedicated towards cyber security — about 11% in 2021 (figure 2.4), down from 13% in 2020
(CyberEdge 2021, p. 29). Moreover, expenditure on cyber security in itself is not sufficient to mitigate risks,
as companies also need to ensure that their security products are integrated into broader business practices,
capabilities and culture (Braue 2022).
Figure 2.4 –Australian businesses’ IT expenditure allocated to cyber security iscomparatively low
Share of businesses’ IT budgets allocated to cyber security, 2021
BrazilTurkeySaudi Arabia
Colombia
USA
China
MexicoSouth Africa
Spain
CanadaItaly
Singapore
UK
Japan
Australia
Germany
France
0

2

4

6

8
%

10

12

14

16

Source: CyberEdge (2022, p. 32).

As many of the benefits from using digital technologies stem from greater connectivity between stakeholders andsystems, the costs of a security incident affecting one person or business can have negative consequences for amuch larger group. This negative externality can have significant consequences: ‘information systems are prone
to fail when the person or firm responsible for protecting the system is not the one who suffers when it fails.
Unfortunately, in many circumstances online risks are allocated poorly’ (Moore 2010, p. 105). For example, thetotal cost of a security breach to a business that collects and holds customer data electronically is higher than thecost incurred by the business itself, as all of that business’s customers would be affected and the negative
impacts could also extend to compromising confidence in other businesses in similar industries. The businesswould underinvest in cyber security if it fails to internalise these wider costs.
This issue is compounded by interdependencies in the use of digital and data tools, and information
asymmetries when the users of these tools are relatively uninformed about potential security risks. Cybercriminals can exploit links between computer networks and systems to attack a wide range of users — forexample, by targeting digital services providers to spread malware through software updates issued to theircustomers, as in 2017’s NotPetya attack and 2021’s SolarWinds attack (Huang, Pearlson andMadnick 2021). But it can be challenging to ascertain the extent of cyber security risks: individuals and29

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reportbusinesses may have difficulty verifying a software vendor’s security performance, making them reluctant toincur additional costs for increased security with uncertain benefits (Kox and Straathof 2014, pp. 2–3). And
where the reporting of security incidents is voluntary, most stakeholders have an incentive to underreportcyber attacks to avoid drawing attention to vulnerabilities and reduce reputational risks.
Businesses of different sizes have different experiences with cyber security risks and investments. The
ABS’s Business Characteristics Survey reported that in 2019-20, smaller businesses were comparatively
less likely to experience (or at least report) a cyber breach or incident, whereas medium and large
businesses were almost twice as likely to report that they were attacked (figure 2.5, left chart). While large
businesses were correspondingly more likely to be using cyber security software (reported by two-thirds oflarge businesses), a smaller share of medium-sized firms (45%) used security software (figure 2.5, rightchart), in spite of being almost as likely to experience an attack.
Figure 2.5 – Cyber threat and security levels vary by business size

16

80

% of firms using
cyber security software% of firms who experienced
internet security incidents or
breaches

Share of businesses experiencing incidents and using security software by businesssize, 2019-20a

14
12
10

8
6
4
2
0

70
60
50
40
30
20
10
0

0-19
persons

20–199 200 or more
persons
persons
Firm size

0-19 persons

20–199persons
Firm size

200 or more
personsa. This chart uses weighted estimates as published by the ABS in its Characteristics of Australian Business 2019-20 publication.
Source: ABS (Characteristics of Australian Business, 2019-20 financial year, Cat. no. 8167.0).

Other studies have also found that small and medium enterprises (SMEs) have less mature cyber security
practices, attributable to issues such as ad-hoc cyber budgets, poor preparation for incident response and alack of understanding of technical security terms (Andal et al. 2022; Cynch Security et al. 2021). According to
the Australian Chamber of Commerce and Industry, ‘it is becoming increasingly important for SMEs inparticular to look to the adoption and successful implementation of digital technologies within a trusted
ecosystem, secured by design that is both robust and resilient’ (ACCI, sub. 47, p. 25).
The negative externalities and information asymmetries associated with cyber risks and incidents provide therationale for government policy on technology and data security, particularly in parts of the system that have
many connections to other individuals and businesses, given the interdependencies described above. This isdiscussed in further detail in section 3.4.

30

Potential barriers to adopting new technologies and data

Finding 4.7
Businesses can underinvest in cyber security protections
Cyber security attacks are costly to respond to and recover from, and security concerns can deter uptakeof digital and data tools. Businesses that do not account for all of these costs to themselves and others
are likely to underinvest in their cyber security. Small and medium businesses are less likely to havemature cyber security practices than large businesses.

31

Targeting government investments and policy priorities

3.

Targeting government
investments and policy priorities

Key points
Technology change and increasing private sector provision of digital infrastructure have led to more
options for regional and remote Australians to connect to the internet. Infrastructure funding
arrangements that currently involve government decisions about technology type and location could bemade more competitive and transparent. Competitive tendering could be a more efficient way to deliver
the government’s Universal Service Guarantee, subject to market feasibility.
Data collected by providers of government-funded services is often not shared. More data sharing andinteroperability in sectors such as health, education, aged care and childcare would improve services
for consumers and system-level policy decisions. My Health Record could provide the foundation forthis in the health sector with some further government efforts around data sharing obligations, software
compatibility, security and de-identification. More broadly, the government can also facilitate more data
sharing and use by extending the Data Availability and Transparency Act 2022 (Cth) to allow
government data sharing with the private sector, and expanding access to the Digital Identity.
Meeting Australia’s digital and data skills needs is an important enabler of future productivity growth.
Industry certifications and short courses provide upskilling and reskilling options for workers todevelop digital and data capabilities. Migration policy could better reflect employer demand for
emerging skills.
Secure use of technology and data is essential for maintaining business and consumer trust, andensuring lack of trust does not become a barrier to adoption. More information is required tounderstand whether the government's regulation of high-risk critical infrastructure sectors has led tounintended economic consequences, such as higher costs or lower investment. Streamlining cybersecurity incident reporting via a single interface would reduce the administrative burden on businesses.
Ethical use of technology and data — particularly via artificial intelligence — is an emerging focus areathat is also required to build trust. While there is broad agreement on good ethical principles,translating these into action is challenging, and more information is required to determine whether
government has a role to play. Regulation (such as privacy regulation) should be targeted to high-riskareas and balance legal and economic concerns to not unduly inhibit productivity growth.
More coordination between digital, data and cyber security policy and regulatory agencies, and moreengagement between agencies and industry, would reduce overlap and inconsistency and lower
uncertainty for businesses.

33

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Government investments and policies provide the foundations that enable businesses to harness emerging
digital technologies and uses of data, including by setting appropriate incentive frameworks and accessrights, and addressing gaps where market provision is insufficient. The government can also support bybuilding trust in these technologies and data uses among both businesses and consumers. Underpinningthese initiatives, adaptable and coordinated governance structures are required to maximise the potential
uses of digital technology and data, and minimise duplication and unnecessary burdens. This chapter
explores six areas where the government could act to improve these foundations and support digital, dataand cyber security activity in the Australian economy (figure 3.1).
Figure 3.1 – Potential areas for governments to improve Australia’s digital, data andcyber security foundations
Enablers of business use
Investing in regional digital
infrastructure

Creating new data sharing andintegration opportunities

Developing digital, data and cybersecurity skills

Building business and consumer trust
Balancing cyber security and growth

Supporting ethical use of technology and data

Governance structures
Coordinating the policy and regulatory environment

The Australian Government has already implemented a range of investments, policies and strategies relating
to digital, data and cyber security. These are brought together in an overarching framework in thegovernment’s Digital Economy Strategy 2030, which seeks to establish Australia as a leading digital
economy and society by 2030. The strategy has three pillars: ‘building the foundations to grow the digital
economy’, ‘building capability in emerging technologies’ and ‘setting Digital Growth Priorities to lift our
ambition’ (PMC 2021c, p. 3).
Given the significant government activity that is already underway in this space, the Commission has
focused its discussion and policy recommendations in this chapter to areas where further action would be
beneficial. Existing government initiatives are summarised, where relevant, as context to the analysis.

3.1

Investing in regional digital infrastructure

Ensuring that digital infrastructure, such as broadband and mobile networks, is fit for purpose is vital tounderpin continued economic growth as technology advances. Australian businesses need this infrastructure
to make best use of productivity-enhancing digital and data tools, and individuals require reliable connectivity
to participate in work and society — including accessing essential services such as health, education andwelfare support — in an increasingly digitised world. This is reflected in the government’s Universal Service
Guarantee for broadband connectivity, discussed in more detail later in this section.
Australia’s population and economic activity is geographically dispersed across its large land mass. While
much of it is clustered around capital cities, regional Australia accounts for about 40% of national economic
output and employs about one third of Australia’s workforce (RAI 2016, p. 4). More recently, the Commission
observed that there has been some population movement from Australia’s cities to regional areas since the34Targeting government investments and policy priorities

COVID-19 pandemic led to increased working from home. Although the number of people moving was small
as a share of city populations, because regional areas have much smaller populations, the effects on local
economies are likely to be more substantial. A population shift towards regional areas would increasedemand for housing and infrastructure, such as telecommunications (PC 2021c, p. 71).
Adequate digital infrastructure is therefore required in both metropolitan areas and regional and remote
Australia. But low-quality connectivity outside of Australia’s cities is an ongoing issue (Internet
Australia 2021). The Australian Government’s 2021 Regional Telecommunications Review referred to the‘patchwork quilt’ of connectivity in regional areas and noted that ‘local councils and other regional
stakeholders are increasingly expected to facilitate telecommunications service delivery, but are notappropriately resourced to identify connectivity needs and support the deployment of suitable solutions’(RTIR Committee 2021, p. 4). The Australian Local Government Association has noted that ‘some regionaland remote areas still lack access to reliable connectivity and pay a higher cost for services compared with
their metropolitan counterparts’ (ALGA, sub. 61, p. 5). Moreover, the Australian Digital Inclusion Index, which
has run since 2014, shows an enduring disparity in internet access and speeds between regional andmetropolitan areas (Thomas et al. 2021).
Infrastructure Australia reports that 23 of Australia’s 48 regions have broadband and mobile connectivity
infrastructure gaps under the Regional Infrastructure Gap Prioritisation Framework (figure 3.2). These areareas where broadband and mobile infrastructure ‘does not ensure user, business and industry needs are
met. The impacts of this gap are wide-ranging, with some remote communities suffering from social
exclusion as a result of limited or non-existent telecommunications infrastructure’ (IA 2022b, p. 41). For
example, in the remote NSW town of Wilcannia, most residents access the internet through mobile
connections but coverage ‘is patchy and unreliable, congested in peak periods and has low penetration
inside buildings… This is further exacerbated by Wilcannia’s remoteness’ (Featherstone, Ormond-Parker
and Holcombe-James 2022, p. 6). As a result, residents have difficulties accessing services such as homeschooling, entertainment streaming, telehealth consultations, online banking and work-related video calls.
Better connectivity also enables essential services in remote communities to be linked together at lower cost
— for example, by connecting schools, healthcare providers (including Aboriginal Community Controlled
Health Organisations) and employment support (such as Centrelink services) so that they can deliver
higher-quality services to local residents.
Improving regional digital infrastructure could lead to significant economic benefits and productivity gains. For
instance, as discussed in section 2.1, unsuitable internet speeds and geographic location were particularbarriers to technology adoption among agriculture, forestry and fishing businesses — which typically operate inregional and remote Australia. The Bureau of Communications, Arts and Regional Research estimated that:… the additional economic benefit from broadband-supported technology could be between $3.0
and $10.6 billion per year (in 2017–18 dollars) for the agricultural sector by 2029–30, which
represents an additional boost to economic activity in agriculture of between 4.7 to 16.9 per centby 2030. (BCARR 2021, p. 5)
This includes through applications such as whole of farm connectivity solutions for crop and livestock
production, which covers large areas, and using sensors to improve the allocation of water and otherresources. Stylised whole-of-economy modelling undertaken by the Commission for this inquiry found that
potential productivity improvements arising from improved regional digital infrastructure (leading to increased
technology uptake in the agriculture and mining industries) would lead to increased real GDP, gross national
income and wages (appendix B). Moreover, in addition to the social inclusion benefits discussed above,
better access to digitally enabled health and education services in regional and remote areas could also35

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

have economic dividends, such as increased workforce productivity and more efficient government
expenditure on service delivery in these locations.
Regional digital infrastructure investment can be undertaken by both governments and private entities. The rolefor publicly funded investments should be limited to areas where the private sector is unwilling or unable toinvest, so that governments avoid crowding out private sector investments that would otherwise have occurred.
Figure 3.2 – Almost half of Australia’s regions have digital infrastructure gaps
Regions with broadband and mobile connectivity infrastructure gaps, 2022aa. Blue shaded areas represent regions that Infrastructure Australia has identified as having broadband and mobile
connectivity infrastructure gaps, defined as areas where the available infrastructure 'does not ensure user, business andindustry needs are met. The impacts of this gap are wide-ranging, with some remote communities suffering from social
exclusion as a result of limited or non-existent telecommunications infrastructure’ (IA 2022b, p. 41).
Source: Infrastructure Australia (2022b, 2022c).

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Targeting government investments and policy priorities

Finding 4.8
Inadequate internet in regional areas limits productivity gains and lowers social inclusion
Some regional and remote communities have poor internet connectivity, which can limit the ability of local
industries to adopt productivity-enhancing technologies and reduce employment opportunities for local
residents (if they are unable to work from home). Inadequate and unreliable connectivity also contributes tosocial exclusion, as residents are less able to access essential services (such as health, education and welfare
support) in an increasingly digitised world.

The diverse technology and sectoral mix of investment
The evolution of digital infrastructure means that there are various ways that businesses and individuals canconnect to the internet.
• Fixed broadband involves broadband services being delivered to a fixed location, and includes fixed line
connections and fixed wireless connections. Fixed line involves running physical cable to a location. NBN
services have a number of different fixed line connection types (such as fibre to the premises and fibre to
the node), which have different ratios of fibre optic cable to copper cable, with more fibre being more
expensive but resulting in a better connection. Fixed wireless connections use wireless receivers toconnect a particular location, rather than using the mobile network.
• Mobile broadband connects users to the internet over the mobile network, requiring mobile base stationsin the vicinity and access to radio frequency spectrum9 to provide the network.
• Satellite technology connects the user via a satellite network, which has historically been a more
expensive option than fixed and mobile services.
Different types of connections will be more or less appropriate depending on the location because of theinfrastructure required. Fixed broadband services typically provide reliable internet, but the need for aphysical connection and the lack of geographic flexibility mean that for some locations, mobile broadband will
be more suitable. However, the reliance of mobile services on base stations can lead to intermittent internet
service in mobile black spots. While satellite connections have been used primarily by very remoteconsumers, cost reductions with technology improvements and increased demand for business andhousehold connectivity have increased satellite connections in less remote parts of Australia (primarily
southern New South Wales and Victoria) over the past year (Fogg 2022).
The suitability of all connection types can change over time as technology progresses. For example, much ofAustralians’ internet usage currently occurs through fixed broadband, but other types of connections may
become more prominent in the future. The Bureau of Communications and Arts Research (now the Bureauof Communications, Arts and Regional Research) has observed that ‘the bulk of data downloaded is through

The Australian Government (specifically, the Minister for Communications) provides high-level policy guidance on Australia’s
spectrum resources, with the Australian Communications and Media Authority having day-to-day management responsibilities
such as implementing spectrum allocations. These respective roles were clarified in 2021 reforms to the Radiocommunications
Act 1992 (Cth) (DITRDC 2022c). The current spectrum allocation system for mobile broadband purposes does not appear to
be a barrier to productivity-improving uses of technology and data. As the use of mobile internet continues to increase,particularly as 5G enables more widespread economic applications, it will be important that the allocation system continues tosupport the highest value uses of spectrum assets. This could require an examination of how spectrum is allocated to otheruses, such as for television broadcasting or government purposes (for example, defence).
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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

fixed networks [although] recent trends highlight that mobile data downloads are growing faster than fixed
downloads’ (BoCAR 2020, p. 74). In this context, the ACCC has recently stated that:
5G mobile and fixed wireless services could become a substitute for fixed line broadband services[and] in some areas are becoming increasingly attractive to consumers as an alternative to fixedline services. However, the technology currently has a limited geographic footprint and it is notclear whether it could service the majority of fixed line broadband end-users. (ACCC 2021d, p. 12)
As such, investing in a mix of technology types to improve regional and remote connectivity is most efficient,
as different connection methods can be used and adapted to more efficiently accommodate the needs ofvarious locations. The Commission has previously advocated for a technology-neutral approach to
government policy on connectivity in its 2017 Telecommunications Universal Service Obligation inquiry,
noting that arrangements should be technologically neutral to allow for cost-effective solutions (PC 2017b,
p. 12), and could include a mix of fixed broadband networks, mobile coverage and satellite services.
The Australian Government currently invests significant amounts in regional digital infrastructure across a
range of connection types. Larger national infrastructure programs generally have a strong emphasis on
improving regional and remote connectivity, and funding is also allocated to specific regional initiatives.
• The National Broadband Network (NBN) provides broadband infrastructure and access to all Australianpremises, predominantly using fixed line connections (representing 92% of its network). A small share ofpremises are serviced via fixed wireless (5%) and satellite technologies (3%) (DITRDC 2021b, p. 1) —many of these are located in regional and remote areas, ‘where premises are spread out geographicallyover many square kilometres’ (NBN 2022). The initial rollout represented a $51 billion infrastructure
investment (NBN 2020).
• The Mobile Black Spot Program (MBSP) seeks to improve mobile coverage across Australia. The
government co-invests with industry to encourage mobile network operators to build mobile infrastructurein areas with limited connectivity. Most MBSP sites are in regional and remote areas (figure 3.3), and forsome mobile network operators, the majority of regional and remote sites they built in 2021 received
government co-funding (ACCC 2021b, p. 12). In total, the government’s $380 million funding commitment
to the MBSP has ‘generated a total investment of more than $875 million, to deliver more than 1,270 new
mobile base stations across Australia’ (DITRDC 2021a).
• The Regional Connectivity Program (RCP) provides grants for ‘place-based’ telecommunications
infrastructure projects in regional and remote Australia. Grants have been provided for a mix of technology
types, including projects to deploy new mobile sites and to upgrade or extend fixed networks, some ofwhich also involve industry co-investment. More than $250 million of government funding has beencommitted to the RCP’s two rounds (DITRDC 2022b).
At the same time as this significant government investment, there is also substantial private sector activity indeveloping regional digital infrastructure in Australia.
• Telstra announced a total investment of $350 million in 2021 to improve its regional and rural networks,
predominantly to enhance and extend mobile coverage. This funding was said to be in addition to theprojects that Telstra had co-invested in with the Australian Government at the time (Penn 2021).
• Telstra has also partnered with satellite communications companies ViaSat and OneWeb to offer its own
satellite services, in competition with the NBN (Burns 2022; Griffith 2022).
• Starlink’s satellite internet services are available in some parts of Australia. The company has groundstations — which connect to its satellites to provide internet services — in New South Wales, Victoria,
Queensland, South Australia and Western Australia, and a licence from the Australian Communications
and Media Authority (ACMA) to sell its services Australia wide (ACMA 2021b; Fogg 2022).

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Targeting government investments and policy priorities• HyperOne announced a $1.5 billion investment in 2021 to build a 20 000 km network of optic fibre cableconnecting every Australian capital city. The network would have ‘more than 1000 “on-ramps” in regionaland remote Australia’ (Crozier 2021), which would improve connectivity in these areas.
Figure 3.3 – Most Mobile Black Spot Program sites are located in regional and remote
Australia
Number of MBSP sites by location, 2022
450
400
350
300
250
200
150
100
50
0
Major Cities ofAustralia

Inner Regional
Australia

Outer Regional
Australia

Remote Australia

Very Remote
Australia

Source: ACCC (2022h, p. 14).

Government investment in regional digital infrastructure should therefore be targeted towards addressing
infrastructure gaps, where required, without unduly interfering with private sector activity. As the Commission
stated in its 2017 Telecommunications Universal Service Obligation inquiry:… ‘market gaps’ or ‘market failures’ do not in themselves provide a case for government
intervention, because such interventions typically generate costs as well as benefits to thecommunity — both directly and indirectly. A case can be made for government to intervene only
where there is a net benefit to the Australian community. The relative merits of policy options
should then be assessed against cost-effectiveness criteria including:••••the cost to the community of achieving a minimum quality of service
technological neutrality
impacts on competition and incentive effects on service providers
administrative costs and regulatory compliance burdens, with regard to flexibility to adjust to
future developments. (PC 2017b, p. 6)

Finding 4.9
Technological change has led to increasing options for internet connectivity
The suitability of fixed and mobile broadband, and satellite technology, as options to reliably connect tothe internet differs substantially across Australia. The market for internet connectivity is evolving rapidly,with a range of private sector providers developing regional digital infrastructure that may address someaccess and reliability gaps.

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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Better data would assist in linking investment to outcomes
Understanding the genuine gaps where government investment would result in a net benefit to Australianbusinesses and individuals requires good data about not just the demand for connectivity in regional andremote areas, but also the quality and adequacy of connection options. Indicators such as internet access,upload and download speeds, packet loss and latency need to be analysed at a regional and local level inorder to properly identify gaps and target government investment (IA 2022a, pp. 80–99).
Much of the data publicly available on internet coverage and speeds is in aggregate across Australia — forexample, the Ookla Speedtest or M-Lab data (section 1.2), though this data suffers from selection issues(AlphaBeta 2019b, p. 9), and data about fixed and mobile broadband use in the ACCC’s Internet Activity
Report (ACCC 2021a), which overcomes selection issues. There is also some aggregate data on internet
quality, with the ACCC’s Measuring Broadband Australia report publishing data on latency, webpage loading
time and packet loss frequency for fixed line connections across Australia (ACCC 2022g, pp. 20–22). Whilethese aggregate datasets can be useful, they do not provide sufficiently granular information for targeting
location-based investments towards regions where there are gaps in access and service quality.
The information that is currently published on geographic disparities in internet quality and adequacy islimited. There is locational data available on NBN coverage by type of connection (such as fixed wirelessbroadband connections, DITRDC 2020), but this provides little information about the geographic variation in
the quality of connections that are actually used by individuals and businesses. The ACCC has reported that
regional outcomes are generally poorer than urban outcomes for fixed broadband services. For instance, theaverage download performance in regional areas was 95% of advertised plan speeds compared with 98%
for urban areas, and the average latency in regional areas was 13.0 milliseconds compared with
10.7 milliseconds for urban areas (ACCC 2022g, pp. 27, 30). However, beyond the broad geographic
classifications of ‘urban’ and ‘regional’, there were no further breakdowns that would enable poor outcomesto be identified at specific locations across regional Australia.10
On mobile broadband connectivity data, the ACCC requires mobile network operators to ‘report on thelocations of their core network and customer access network’ under the Audit of Telecommunications
Infrastructure Assets — Record Keeping Rules (ACCC 2022e). The maps that are published by these
operators provide some information about the availability of mobile coverage in specific locations and thepotential quality of connections (based on predicted 3G, 4G or 5G coverage; actual speeds are not part ofthese maps). The ACCC has observed that their efforts to improve disclosure of data on mobile connectivity
outcomes provide ‘useful information on the state of mobile networks for policymakers, particularly when
formulating policy responses to mobile coverage issues’ (ACCC 2021b, p. 2). Telstra submitted that mobile
network coverage data tends to depict availability rather than speeds because ‘with fixed networks there iscapacity to readily observe and report on service standards consistent with plans sold in the market, butmobile networks are not amenable to this given the issues of variability and contention… noting mobile plans
are typically sold based on data allowances as opposed to speeds’ (Telstra, sub. 174, p. 23).
Ultimately, geographic breakdowns of internet connectivity, quality and adequacy are not available at a
sufficiently granular level to measure digital infrastructure gaps and inform targeted government

10 This is broadly comparable to the geographic granularity available in other developed countries’ internet speed data.

For example, the Measuring Broadband America reports publish national statistics about measured download speeds,
latency and packet loss for selected internet service providers (FCC 2021). The Measuring Broadband Canada program
adopts a similar approach to collecting performance data as Australia and the United States (CRTC 2020). In theEuropean Union, the Digital Economy and Society Index includes country-level data on the share of households withbroadband connections above particular thresholds (2 Mbps, 30 Mbps, 100 Mbps, 1 Gbps) (EC 2021a).
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Targeting government investments and policy priorities

investment.11 To inform its assessment of broadband and mobile connectivity gaps in the Regional
Infrastructure Gap Prioritisation Framework (discussed above), Infrastructure Australia undertook extensive
surveys, submissions and regional workshops (IA 2022b, p. 21). A more comprehensive and granular sourceof data about connectivity outcomes, collected on an ongoing basis, would improve location-based decisions
for the public and private sectors about how and where to invest in regional digital infrastructure.
In addition to informing investment decisions, improved data on internet speeds would also enable more
informed regulation. The Australian Government has implemented a Universal Service Guarantee (USG)
requiring that ‘all Australians [have] access to broadband as well as voice services’ (DITRDC 2021b, p. 1).12
The guarantee includes minimum standards for peak broadband speeds, and these needs are likely tochange over time as demand for data and connectivity increases in the future. As such, the 2021 Regional
Telecommunications Review recommended that: ‘the minimum USG standards, including download/upload
speeds and performance during peak or busy hours, will need to increase and should be subject to anannual review, particularly for consumers outside the NBN fixed line footprint’ (RTIR Committee 2021, p. 12).
This would be most effectively paired with better data on connection access, quality and adequacy.
But collecting this data at a granular geographic level is not a straightforward task. For instance, in its
analysis on mobile connectivity in its Mobile Infrastructure Report 2021, the ACCC noted that assessing
mobile coverage by location can be challenging because ‘the mobile network operators use predicted
coverage as the basis for their coverage maps, and their input assumptions and metrics are different. They
can also change input assumptions from time to time, which makes it difficult to accurately assess coveragechanges’ (ACCC 2021c).
Data about the ability for individuals and businesses to use the internet would ideally be collected basedon the desired outcome — that is, whether access to and the quality of connections is fit for purpose.
Consistent outcomes data about internet access and the quality and adequacy of connections in particularareas, across all types of connections (fixed broadband, mobile broadband and satellite), would facilitate
technology-neutral decisions about what investments are most appropriate for specific locations where
government funding may be required.

Improving transparency on how investment decisions are madeDespite the significant government investments in regional digital infrastructure (discussed above), there is a lackof transparency about how these investments are made and which priorities are pursued. Allocating funding underprograms such as the NBN, MBSP and RCP to specific areas or connection types means less funding available
for investment in another location or technology. There is limited transparency about how such trade-offs havebeen weighed and if decisions made appropriately considered the relevant benefits and costs.

11 The analysis in this chapter is primarily based on publicly available data about connectivity outcomes. It is unclear

whether providers and/or regulators have access to unpublished information at a more granular geographic level.
12 The USG’s reference to voice services reflects the fact that it incorporates the old Universal Service Obligation (USO),
which guaranteed access to landline telephones and payphones. The inclusion of broadband services in the USG, which
was first announced in 2017 as part of plans to replace the USO, was intended to align the guarantee with the ‘significant
changes in technology, the marketplace and customer preferences’ (DCA 2018, p. 7) that have taken place in more
recent years — with reliable access to internet now essential for participating in the modern Australian economy andsociety. The technology options that are now available to deliver internet (discussed above) are also able to provide
voice services, either directly or effectively as a by-product of data services (e.g. voice calls via the internet).
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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

For example, although the Department of Infrastructure, Transport, Regional Development, Communications
and the Arts assesses RCP grant applications based on publicly available program guidelines (DITRDCA,
sub. 201, p. 10), the Australian Communications Consumer Action Network:… expressed concern regarding the Federal Government’s Grant Guidelines for the RCP Round 2 …
[it] considers whether the project supports a government priority without clearly defining what the
government priority may be, in addition to the Department reserving the right to recommend
funding a project which may be lower ranked against merit criteria. Stipulations such as this within
grant guidelines adds uncertainty and reduces transparency from the grant process. (ACCAN,
sub. 118, p. 7)
And while it is clear that much of the MBSP program targets investment in regional and remote areas (figure
3.3, DITRDC 2021a), and the government publishes data about community-reported mobile black spots(Australian Government 2021b), there is opacity about how the mobile sites are prioritised and selected forgovernment investment. The Commission previously recommended in 2017 that transparency in funding
decisions could be improved by:… commission[ing] an independent evaluation of the Mobile Black Spot Program. Such anevaluation should consider measures to improve the program’s operation, to best ensure that the
program’s objectives are prioritised and site selection is evidence-based. (PC 2017b, p. 23)
This recommendation was not accepted by government.
A similar case can be made for improving transparency about government decisions on providing funding to
the NBN. For instance, the 2022-23 Budget included a $480 million grant to upgrade the NBN’s fixedwireless towers, which will improve broadband speeds and increase data allowances for some users(DITRDC 2022a). In addition, the government announced in October 2022 that it will provide a $2.4 billion
equity injection to expand fibre-to-the-premise connections to a further 1.5 million premises. In both cases,
funding has been allocated without a competitive process, with the claim that ‘given the investment to date in
the network and the incremental cost of upgrading it and the other options available, the Government
considers this is a value for money investment’ (DITRDCA, sub. 201, p. 7). However, it is unclear how thedecision was made to allocate government investment towards these connection types or locations. It will be
important that these upgrades are accompanied by transparency about how and why they are to beundertaken, to ensure taxpayer funds are being spent efficiently.13
In addition, State and Territory Governments also make significant investments in regional digital infrastructurethat would benefit from increased transparency about how funding decisions have been made. These include theConnecting Victoria Program, NSW Regional Digital Connectivity Program, WA Digital Connectivity Program andSouth Australia’s Mobile Network Extension Devices Pilot Program (Gary McLaren, sub. 137, p. 5).
Periodic independent reviews of digital infrastructure programs such as the RCP, MBSP and NBN would
increase the likelihood that government funding for such investments is allocated to those specific locations
and technology types that would yield the highest benefits for the community. Evaluating these investments
13

In addition to individual grants and equity injections, the NBN also receives funding for its loss-making fixed-wirelessand satellite services through an internal cross-subsidy that is supported by the Regional Broadband Scheme levy. In theAustralian Government Competitive Neutrality Complaints Office’s investigation of NBN Co, the Commission recently
observed that the government could replace this levy arrangement with direct Budget funding for these non-commercial
services (an option that has also previously been suggested by the ACCC) (PC 2022, p. 41). This would provide moretransparency about the costs of providing these services. It may also be used to transition towards the more competitive
funding arrangement discussed below, whereby the direct funding could eventually be made available to the provider
that can deliver the required services in the most cost-efficient way, as identified through a tender mechanism.
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Targeting government investments and policy priorities

would also enable governments to assess whether current funding allocations and policy settings areappropriate as demand and supply in the market changes for other reasons — for example, strong
population growth in particular towns or increased private sector investment in regional digital infrastructure.
This allows governments to adjust their investments accordingly over time.

Technology improvements could enable more competitive funding
arrangements
Given the complex technology- and location-specific aspects of connecting regional and remote Australia to theinternet, there may be a more efficient way for government to fund digital infrastructure investments. It can bedifficult for the government to decide on the type of infrastructure that would most cost effectively deliver the
USG’s minimum standard in a given location. The government could instead consider using a technology
neutral market-based mechanism such as competitive tendering, which may lead to more efficient outcomes
and address gaps in regional and remote connectivity at lower cost. The mechanism could also be designed topromote data collection on service outcomes and transparency on funding decisions.
For example, instead of allocating regional digital infrastructure funding through programs such as the NBN,MBSP and RCP, the government could offer to pay the lowest-bidding service provider to deliver connectivity
to a particular area, defined at the regional level, subject to conditions such as minimum service standards
and maximum prices charged to consumers. The government would have flexibility in defining these
conditions across different regions; for example, there may be equity or social inclusion reasons (discussed
above) for requiring relatively lower price caps in very remote areas, if people have less ability to pay forbasic internet services in these locations. Tenders could also be designed to give service providers flexibility
to realise economies of scope across different regions, such as by allowing combinatorial or package
bidding, so that providers can bid for a package of locations where there might be efficiency gains fromsupplying all of these areas together.
Successful tenders may include an upfront payment, with full funding to be provided over time as theprovider delivers on their commitment — contracts should therefore be of a sufficient length for service
providers to earn a return. A new tender would be issued after this period to ensure providers remaincompetitive. If thin markets are an issue and the call for providers in a particular location leads to only one
party being willing to participate in the tender, the government may need to enter into individual negotiations
with that provider — effectively the provider of last resort — to avoid being held captive by that one party.
The intent of such a mechanism would be that government pays the least-cost private provider to guarantee
a minimum service level in each location, with the cost to government determined by the market. It would notpreclude other private sector providers from competing in that region, such as by offering more advanced or
niche products that consumers may be willing to pay more for, or if they lower their costs by investing in newtechnologies over time.14
The Commission has previously recommended competitive tendering for public infrastructure and services
provision, noting that it creates incentives for providers to keep prices closer to the cost of delivery (PC 2014,

14 This section’s discussion about competitive tendering for the USG is focused on connectivity in regional and remote

Australia, as it is in these areas that the government’s activity would have larger benefits in delivering more efficient
outcomes. The ‘universal’ aspect of the USG means that the Australia-wide mechanism would apply to metropolitan
areas as well, with a tender offered for each metropolitan location (just as regional and remote tenders would be definedby location). However, as the higher population density in metropolitan areas means that it is generally commercially
viable for multiple broadband service providers to co-exist and compete (for example, ACCC 2021d), in practice acompetitive tender for these locations would be bid down to zero.
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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

2015, 2017b). In its Telecommunications Universal Services Obligation (USO) inquiry, the Commission also
observed that a tender mechanism for these specific services should:• specify service requirements as outcomes rather than prescriptive inputs, technologies or processes, as
this encourages innovation and lower-cost service delivery• require clear performance reporting to allow for provider accountability and enable government to identify
gaps in service provision• acknowledge the advantage that incumbents or dominant providers have in tendering, and avoid
discriminatory service requirements (PC 2017b, p. 260).
In considering the design of a tender mechanism for funding digital infrastructure investment to deliver the USG(which replaced the USO), similar principles apply. For example, outcomes-based requirements for reliable andgood quality internet services could include upload and download speeds,15 latency or even the ability to accessessential services online (such as telehealth). And existing data about service outcomes could be improved as partof implementation, such as by requiring service providers to self report outcomes as part of the tender’s performance
reporting requirements, complemented by independent assessments of internet reliability and quality.
In relation to existing providers that may dominate the regional digital infrastructure market, some service
providers already observe that Telstra and NBN Co are large incumbents in regional and remote Australia.
• Competitors have argued that Telstra’s physical line network, partly funded through government subsidies over
the years, provides advantages in delivering mobile services as it supports greater backhaul capacity inregional and remote areas (Optus 2016, p. 23). As such, even though the MBSP uses tenders to allocate
funding, ‘in reality Telstra faces little competition across areas where other mobile network operators lackbackhaul capacity to support the cost-effective rollout of these new base stations’ (VHA 2016, p. 12).
• Previous government funding and policies aimed at subsidising the NBN in regional and remote areas
could provide NBN Co with a competitive advantage. For example, the Regional Broadband Scheme wascreated to ‘fund the financial losses of NBN Co’s fixed wireless and satellite networks’ (ACCC 2020, p. 1),
requiring telecommunications providers to pay a levy to NBN Co for each premise they supply with adesignated broadband service over a local access line owned by the provider (ACMA 2021a). Thisdisincentivises providers from building and using their own fixed line infrastructure (Boyd 2021).
The government trialled a market-based mechanism to deliver the USO in 2001 to reduce costs, increasetransparency, improve performance and compliance, and encourage new providers to enter regional markets(Jackson 2000). However, the trial was not a success as no providers participated in the scheme:
Under this pilot program, carriers could nominate to be a universal service provider in one or both of
the two nominated areas and would receive a set subsidy for each customer they supplied in thatarea. Carriers were required to supply any individual requesting a service within the nominated area,
which meant that potential competitors were required to have a network capable of supplying every
individual within the area. No carrier nominated to become a universal service provider under thisscheme. (ACCC 2007, p. 12)
The ACCC later observed that competitive tendering for the USO had become more feasible in the years
following the 2001 trial due to technological advances (ACCC 2007, p. 12, 2016, p. 7). With further

15 As an international example, in July 2022 the Chairwoman of the US Federal Communications Commission suggested thatthe national standard for minimum broadband speeds be increased from 25 Mbps to 100 Mbps for downloads, and 3 Mbps to20 Mbps for uploads. Chairwoman Jessica Rosenworcel also proposed that the FCC ‘consider affordability, adoption,
availability, and equitable access as part of its determination as to whether broadband is being deployed in a reasonable andtimely fashion’ (FCC 2022).
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advancements in technology and increasing competition in the broadband market (across fixed, mobile andsatellite connections), the government may be in a better position to deliver the USG through tender.
Participants to this inquiry expressed mixed views on whether such a tender mechanism would work inpractice at the present time. Several stakeholders observed that delivering the USG via competitive tenderwould encourage internet connectivity to be delivered at lower cost from a range of providers; foster
competition by providing opportunity to smaller industry players; improve the transparency, accountability
and efficiency of government investment; and enable more extensive data analysis to inform investment
decisions (ACCAN, sub. 118, p. 8; Gary McLaren, sub. 137, p. 8; IAA, sub. 168, p. 2). And somestakeholders also highlighted low earth orbit satellites as a particular type of technology that is already being
offered in Australia and could change the way that the USG is delivered in regional and remote areas (Gary
McLaren, sub. 137, p. 6; NBN Co, sub. 147, p. 12; Vocus Group Ltd, sub. 121, p. 2).
However, questions remain regarding whether technology and market competitiveness have sufficiently
developed in regional and remote areas to feasibly implement a competitive mechanism for the USG at thecurrent time. Although this section has outlined various examples of private sector investment in regional
digital infrastructure and new providers entering the overall Australian market, it is unclear whether theywould elect to participate in tenders to deliver the USG across all or most of the regions defined by thegovernment. The Department of Infrastructure, Transport, Regional Development, Communications and theArts observed that for smaller service providers and start-ups, ‘their capability and long-term sustainability
would need to be considered closely. The implications of providers cherry-picking more lucrative or desirable
markets would need to be considered’ (DITRDCA, sub. 201, p. 14). And NBN Co noted that:… there may be a tension between allowing private participants to selectively pick (by tendering)
specific areas to serve and the efficiency with which less commercial areas can be served.
Economies of scale are critical to development and deployment of telecommunications
infrastructure … At present, neither vertically integrated smaller providers nor bigger foreign
players are likely to have on-ground service and support capabilities to adequately serve large or
multiple parts of regional Australia. (NBN Co, sub. 147, p. 8)
Transitioning existing government funding arrangements for regional digital infrastructure to a tendermechanism would lead to more efficient outcomes, but moving too early before technologies and markets
are sufficiently developed to support a more competitive approach to funding risks failure. The government
should therefore seek to transition towards such an arrangement once it is feasible, and could undertake
market testing to understand whether this is possible now or, if not, at what point in the future implementation
would be appropriate given the expected trajectory of technological and market development. Such anassessment could be undertaken by the ACMA and/or the ACCC.

Finding 4.10
Government investment in regional digital infrastructure often lacks transparency
Current funding arrangements for regional digital infrastructure involve government decisions about thetypes of technology and locations receiving public investment, and these decisions often lacktransparency. Productivity-enhancing access to low-cost and reliable internet services could be delivered
through a more competitive and transparent approach that facilitates market participation by a range ofproviders, such as through competitive tendering. Tenders could be technology neutral and adapted todifferent regional and remote community needs (on service outcomes and price), but the approachrequires sufficient technological and market development to be feasible.

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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Recommendation 4.1
Better access to digital infrastructure in regional communities by improving funding
mechanisms
The Australian Government should more efficiently and transparently fund digital infrastructure
investments to motivate improved provision in Australia’s regional communities.
This would ultimately require a transition in funding arrangements from the current patchwork of programs
to a single market-based tender mechanism for delivering the Universal Service Guarantee, once themarket for internet connectivity services across all technology types (fixed line, mobile, satellite) is
sufficiently competitive to support such an arrangement.
The government should request that the Australian Communications and Media Authority and/or theAustralian Competition and Consumer Commission undertake market testing to understand whether it iscurrently feasible or, if not, when technology improvements and new market entrants would enable a more
efficient tender mechanism to be implemented.
In the meantime, governments should improve transparency about how funding is allocated for existingregional digital infrastructure programs, including publishing the reasons for funding decisions andevaluating the outcomes of previous investments.

3.2

Creating new data sharing and integration
opportunities

There have been several government initiatives to improve data sharing since the Commission’s 2017 Data
Availability and Use inquiry (PC 2017a): box 3.1 describes actions for sharing government data, while theConsumer Data Right (CDR) is discussed in the section below. The strong focus on sharing public sector
datasets is consistent with global policy activity — an OECD survey of 205 data sharing initiatives across 37
countries found that ‘the large majority of government initiatives focus on access to and sharing of publicsector data (almost 65% of all initiatives), with the majority of these initiatives aiming at enabling open
access to government data’ (OECD 2019, p. 117).

Box 3.1 – Recent initiatives to improve public sector data sharing
The Australian Government has implemented a national regime for sharing public sector data throughthe Data Availability and Transparency Act 2022 (Cth) (DAT Act). The Act facilitates data sharing from‘data custodians’, which are generally Commonwealth agencies, to ‘accredited users’, who have been
approved to receive data for the purpose of improving service delivery, informing policy development
and/or research. The legislation also establishes the National Data Commissioner, an independent
regulator responsible for overseeing the data-sharing scheme and broader education activities aboutpublic sector data sharing and use (ONDC 2022).
The proposed data sharing model in the original DAT Bill allowed for public sector data to be shared withthe private sector. However, following amendments, the legislation that was passed specified that46

Targeting government investments and policy priorities

Box 3.1 – Recent initiatives to improve public sector data sharing
industry and other private organisations are not allowed to participate and receive data in the scheme(Sadler 2022). As the reason for initially excluding the private sector was to establish the scheme andallow it to mature, some stakeholders have observed ‘it may be that following further review, the DAT Act
will eventually be expanded to allow private sector organisations to receive public sector data’ (Catania,
Wheelahan and Mani 2022). The Act stipulates that there will be a review of the scheme in three years,
along with a five-year sunset clause.
The DAT scheme underpins the government’s Australian Data Strategy, which was released in May 2021
(PMC 2021b). The strategy and its supporting action plan (PMC 2021a) outline the Australian Government’s
three data priorities — enabling greater data use, improving data safety and security, and maximising thevalue of data — and highlight how separate government initiatives and policies align with these priorities.
Government investments in specific datasets and infrastructure mentioned in the action plan include:• the Data Integration Partnership for Australia program and creating the Multi-Agency Data Integration
Project (MADIP) and Business Longitudinal Analysis Data Environment (BLADE), which respectively
link the government’s people-based and business-based datasets for policy research. These havebeen used to inform the COVID-19 vaccine strategy by sociodemographic cohorts, measure theemployment and social outcomes of vocational education students, and examine the benefits ofgovernment support for Indigenous environmental programs (ABS 2022a, 2022c)• the Digital Atlas of Australia, an interactive online platform that will link Australian Government
datasets based on location, to be beta-tested in mid-2023• sector-specific initiatives in areas such as collecting and sharing freight data, modernising waste datavisualisation, integrating regional datasets and gathering more geoscientific data on Australia’s resources.
Separately, the Intergovernmental Agreement on Data Sharing was signed by the Australian and State andTerritory Governments in July 2021. All jurisdictions have committed to sharing public sector data ‘as a default
position, where it can be done securely, safely, lawfully and ethically’ (National Cabinet 2021, p. 1). Data will
be shared under existing privacy laws (including the Privacy Act 1988 (Cth) and state and territory privacy
legislation) for the purposes of ‘informing policy decisions; designing, delivering, and evaluating programs;
tracking implementation; and/or improving service delivery outcomes’ (National Cabinet 2021, p. 2).

Australia performs relatively well on government-facilitated data sharing compared with other countries. For
example:• the UN’s E-Government Survey 2020 reported that Australia has a ‘very high’ level of open government
data, based on an index examining countries’ foundational policy frameworks, data-sharing platforms anddata availability in various sectors (UN DESA 2020, pp. 258, 317)
• the Global Open Data Index 2016/2017 ranked Australia as second out of 94 countries on the publicationof government data, with particularly high scores in the availability of national statistics, high-level budgets
and geographical information (such as maps and administrative boundaries) (Open Knowledge
Foundation 2017). However, Australia performed poorly on publishing detailed transactional data on
government expenditure• the World Bank’s 2021 Global Data Regulation Survey examined 80 countries on 37 data-related policies,
including 16 enablers of data sharing that relate to accessing public intent data and reusing private intent
data (World Bank 2021b, ch. 6). High-income countries had adopted more enablers than middle- andlow-income countries, and Australia ranked highly relative to other high-income countries (figure 3.4).

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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

However, while Australia has some data sharing frameworks and infrastructure in place, there is still
significant room for improvement to generate value and productivity growth from the use of data accessible
under these frameworks. This includes increasing the number of organisations and individuals able to takeup new opportunities to access and use data under these frameworks, and improving data availability andsharing in sectors of the economy where data remains relatively inaccessible but there is potential forsignificant benefit. It is particularly important to act now to leverage the increasing volumes of data that are
being generated as more economic activity is digitised, including since the COVID-19 pandemic (asdiscussed in chapter 1).
Figure 3.4 – Australia has relatively mature data enabler policies
Share of enabler regulatory practices adopted by high-income countries, 2021a
Mauritius
IsraelSingapore
Qatar
Oman
Saudi Arabia
Chile
Uruguay
CanadaUnited Arab Emirates
Korea, Rep.
Australia
Estonia
United Kingdom
0

10

20

30

40

50
%

60

70

80

90

100

a. Estimates are based on the Global Data Regulation Diagnostic Survey Dataset 2021, published by theWorld Bank. The dataset includes five data enabler policies relating to e-commerce, seven relating to public
intent data and four relating to private intent data. Where the dataset includes multiple responses for a single
policy, these responses have been aggregated to a single measure for that enabler. For example, a country
is deemed to have common technical standards in place for government entities if it mandates at least one of
the four types of standardisation options; it is not necessary for the country to have all four in place.
Source: World Bank (2021a).

More value from consumer data portability
The amount of data produced and analysed by the private sector has continued to increase rapidly since theCommission’s 2017 Data Availability and Use inquiry (PC 2017a, p. 80). The potential to use this data to
improve decision making, tailor services for customers and generate operational efficiencies is now wellestablished. Governments can support greater sharing and use of consumer data through data portability
policies, enabling consumers to authorise businesses holding their data to provide that data to third parties.
Australia’s Consumer Data Right (CDR) is an important example of enabling data portability for consumer
benefit (box 3.2). To avoid disincentivising data collection and use (section 2.2), portability should be limited
to data that is jointly produced by consumers and businesses through transactions between these parties,
rather than being required for data that businesses have analysed and added value to. Australia’s approachto consumer data portability is ‘unique [compared with other countries] in its commitment to implement

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economy-wide standardisation of consumer data with the only limits to the range of services enabled by
CDR being “the imagination of entrepreneurs”’ (Buckley, Jevglevskaja and Farrell 2022, p. 26).

Box 3.2 – The Consumer Data Right rollout is progressing
A Consumer Data Right (CDR) was enacted by the Australian Government through the Treasury Laws
Amendment (Consumer Data Right) Act 2019 (Cth). The CDR is being rolled out in stages, with ongoing
consultation with industry and other stakeholders being a key part of the staged rollout.
The banking sector was first to be designated for the CDR in September 2019. Data sharing requirements
were gradually phased in, starting with product and customer data on individual accounts, followed byinformation about business finance. The rollout was also staged such that the major banks were required tocommence their data sharing obligations before non-major banks (Australian Government 2021a). As at
mid-December 2022, there were 38 accredited data recipients (ACCC 2022b) and 114 active data holders(Australian Government 2022).
Implementation for the energy sector, which was designated in June 2020, is in progress. The rollout isanother staged approach whereby product and customer data sharing obligations first commence for thethree largest energy retailers, Australian Energy Regulator and Australian Energy Market Operator.
Sequencing of the energy sector rollout, which began in October 2022, ‘aims to ensure that CDR
obligations first commence with participants that will provide the greatest coverage to enable consumers
to benefit’ (Treasury 2021a, p. 4).
Telecommunications was the most recently designated sector in January 2022. Similar to banking andenergy, the information that will be shared under the CDR includes product and customer data, with thegovernment planning to consult with industry on the rules and standards to apply (Kwan 2022).

Several recent reviews have examined opportunities to expand the CDR framework.
• The 2020 Inquiry into Future Directions for the Consumer Data Right examined how to expand the CDR’s
functionality and link CDR infrastructure with the broader data and digital economy (Farrell 2020). Its 100
recommendations included reforms to implement action initiation, such as payment initiation and accountswitching (discussed below). The government has agreed or agreed-in-principle to 94 of the inquiry’s
recommendations (Treasury 2021b).
• In late 2021, the Commonwealth Treasury undertook a Strategic Assessment on the next sectors anddatasets that should be covered in the CDR rollout. It concluded that open finance should be the next areaof focus, targeting high-value datasets from the superannuation, general insurance, merchant acquirer
and non-bank lending sectors, as well as complementary data held by governments (Treasury 2022b).
• The Statutory Review of the Consumer Data Right, released in September 2022, reiterated the potentiallysignificant impacts of action initiation under the CDR. For example, the CDR could facilitate digital
payments as ‘its unique framework for secure transfers of consumer, product and service data canintegrate with and augment existing and emerging payment channels’ (Treasury 2022c, p. 5).
While the CDR rollout is progressing and providing strong foundations for consumer data sharing, a great
deal of the value that could be created from this data portability has yet to be realised. For example, in thebanking sector, there are only 38 accredited data recipients and development of innovative products or
improvements to customer service based on the CDR appear to be in their early stages still.

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Some reports suggest that service providers are starting to replace ‘screen-scraping’ methods of collecting
customer data (which are unregulated, more costly and less secure) with accessing higher quality
information through the CDR. One fintech has observed that the CDR’s ‘cleaner set of data … is important
as we look to add insights to help the emerging customer experience — like instant decisioning,straight-through-processing, or various nudges lenders can make to consumers’ (Eyers 2022b). However,variable data quality from some banks and the time required to fix these issues (sometimes more than aweek) may slow uptake (Eyers 2022a). The ACCC introduced a CDR sandbox in July 2022, providing anenvironment for potential and current CDR participants to test their CDR offerings and solutions, which could
assist in improving data quality (ACCC 2022a).
Expanding the CDR’s sectoral coverage and incorporating additional functions will create new uses of andtherefore value from the data. Gemaker submitted that ‘extend[ing] more rapidly the Consumer Data Rightregime implemented for banking and energy – which has provided a strong basis for citizen trust – into othersectors [would] promote digital innovations that deliver similar productivity and user benefits’ (Gemaker,
sub. 13, p. 3). In addition, enabling action initiation in the CDR has the potential to result in significant
consumer benefits, including:… overcoming [consumers’] friction when carrying out actions with their providers, as well as
behavioural issues such as status quo biases… and reduc[ing] the complexity, time and costs to
consumers seeking to carry out actions. Action initiation could support a range of actions that may
be undertaken on the consumer’s behalf. These may differ depending on each sector but could
include enabling [an] accredited person to initiate payments, update personal information, changebilling delivery preferences, open and close accounts and assist consumers to switch from one
provider to another. (Farrell 2020, pp. 19–20)
The government sought comment on exposure draft legislation to enable action initiation in late 2022. This
would allow the CDR to ‘create a new channel for consumers to instruct a business to initiate actions on theirbehalf and with their consent. These actions could include making a payment, opening and closing an
account, switching providers and updating personal details (such as address) across providers’(Treasury 2022a, p. 1). Ultimately, making it easier for consumers to switch between products and providers
will spur competition between businesses to deliver better services to Australian consumers.

Finding 4.11
The Consumer Data Right is a good foundation but has low uptake
The Consumer Data Right (CDR) provides a strong foundation for consumer data sharing, but relatively
low uptake means its economic benefits are yet to be fully realised. Initiatives such as the CDR sandbox,which may improve data quality, and introducing action initiation could increase uptake in the future.

More value from data provided to government agencies
Notwithstanding the advances in data sharing over the past five years, there remains significant potential to
improve — for the benefit of the community — the sharing, integration and use of data that is held bygovernment agencies. While progress on the underlying frameworks and legislation has been made overrecent years (box 3.1), some stakeholders observe that the cultural barriers preventing greater data sharing— which were highlighted in the Commission’s 2017 Data Availability and Use inquiry — still exist today.

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The [Commission’s 2017 inquiry] found ‘a very real culture of risk aversion and risk avoidance inthe public sector when it comes to data release’. Anecdotally, this culture of risk aversion andavoidance has changed little since then. … the main impediment to data sharing is still a culturalone, supplemented by a lack of clear agency-specific guidelines and guardrails as to what can beshared, to whom and in what circumstances. (Christie and Wong 2021)
It is important to think broadly about what data can be shared and combined, and the potential users who
might create value from this data. This could include agencies from different levels of government (including
local government) and universities, as well as benefits arising from cross-sector uses of data; for instance,businesses or not-for-profit organisations deriving value from combining their own data with government
data. Breaking down silos between these groups, such as via data sharing agreements16 or otherpartnerships (in the case of data users outside of the public sector and academia), could create newopportunities for data use.
Agencies that successfully embark on collaborative data sharing initiatives should be highlighted as
examples where risk aversion has been overcome to yield benefits for businesses and individuals, as theirexperiences can provide lessons for others seeking to improve data sharing and use. The Australian
Taxation Office (ATO) and ABS are prominent examples of how government agencies can lead the way increating shared value using data they collect and hold, and the National Disability Insurance Agency (NDIA)
has also commenced digital and data partnerships with the private sector in recent years (box 3.3).
Based on the experiences of these government agencies, features of successful arrangements that havecreated value via data sharing include:• Working with digital service providers to integrate data requirements into software products that are alreadyused by businesses, to reduce reporting burdens and maintain data quality. In implementing the Single
Touch Payroll (STP) system, which captures near-real time payroll information entered by businesses in theiraccounting software, close collaboration between the ATO and digital service providers ‘was a huge factor in
the program’s success’ (DSPANZ, sub. 18, p. 2). The ATO set up a Digital Partnership Office to facilitate thiscollaboration. The NDIA has a Digital Partnership Program with a similar purpose.
• Supporting businesses with more limited capacity or digital capability. The ATO adopted a staged
approach to implementing STP to assist employers through the transition: large employers were required
to report via STP before small employers, and there were concessions for some businesses that needed
more time, such as micro employers and seasonal employers (ATO 2021c, 2021a, 2021b). Meanwhile,
the NDIA allows smaller service providers to connect to their data and systems via ‘aggregator’ software
companies, enabling the benefits of improved data use to flow broadly across the sector, including toproviders that would not have the capability to connect directly to the NDIA’s systems themselves.
• Considering innovative and high-value uses of data across public and private entities, beyond meeting
administrative and operational needs. For example, the ATO makes de-identified individual and businesstax data available to be linked to other datasets in MADIP and BLADE, for research purposes (box 3.1).
STP data is used to support government policy decisions and service delivery, including as a critical input
for the government’s economic response to COVID-19 (Hambur et al. 2022). The ABS is also seeking to
combine and report data collected from businesses’ accounting software back to businesses so that they
can compare their performance against others.
• Using data sharing to build relationships in the broader ecosystem. In the Commission’s consultations,
one business described the ATO’s leadership as a ‘symbiotic relationship’ with industry — the agency has
enabled more data collection and sharing through STP and other digital initiatives, which has, in turn,
16 The Data Availability and Transparency Act 2022 (Cth) provides for accredited data users and data custodians to enter

into data sharing agreements for the use of data in particular projects that serve the public interest.
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allowed technology providers to create new value in the wider business ecosystem. And the NDIA’s focus
on digitisation and data has led to the formation of a Digital Community of Interest, where organisations
share learnings and feedback about the change process.

Box 3.3 – Examples of government and private sector digital and data partnerships
The Australian Taxation Office (ATO) provides a case study on how government agencies can lead the way increating shared value using data. Significant volumes of data must be collected from individuals andbusinesses every year as part of tax administration. The ATO sees data usage — and digitisation more
broadly — as an opportunity to improve taxpayers’ engagement with the tax system, by facilitating‘well-designed client experiences’ in a system where it is ‘easy to comply, but hard not to’ (Hirschhorn 2021).
To improve digital uptake and support new uses of data, the ATO works with digital service providers(which provide accounting, tax and other software to businesses) to integrate data requirements into theirsoftware products, minimising reporting burdens while maintaining information quality. The agency has a
Digital Partnership Office to support these collaborations with the private sector, which has enabled, forexample, the co-design of software standards and security mechanisms (ATO 2019).
Moreover, the ATO’s leadership in technology and data use has encouraged many Australianbusinesses to digitise and adopt potentially time-saving software solutions. For example, prior to theintroduction of the Single Touch Payroll (STP) system, which commenced in 2018 and captures near-realtime payroll information entered by businesses in their accounting software, about 48% of employers
lodged their payment summary annual report with the ATO in a non-electronic format. Now in 2022,
approximately 90% of employers interact electronically with the ATO in near real time as they run their
payroll and report that information (ATO, pers. comm., 17 May 2022).
There are currently more than 300 STP product offerings listed on the ATO’s online register ofcommercially available products (ATO 2022), and ecosystems of digital service providers have grownaround the data that businesses are entering into their software platforms. For example, the cloud-based
accounting software provider Xero underpins a platform of over 1000 apps. These apps take data thatbusinesses enter into Xero, combine it with other sources and tools, and produce valuable insights suchas cash flow forecasts, dashboard reporting, flagging risks and linking to e-commerce platforms. In 2020,
each developer or app partner in this Xero ecosystem spent more than $20 000, on average, on
innovations such as increasing efficiency, implementing new ideas and anticipating future needs(Xero 2021b, p. 15). The ATO has catalysed innovative activity in such ecosystems — it established andmaintains the framework for collecting businesses’ data, enabling software providers to push this databack to businesses in more valuable forms (with consent and appropriate protections).
The ABS is working with digital service providers to allow businesses to complete the Quarterly BusinessIndicators Survey through their accounting software from March 2023. Businesses will benefit in several
ways: first, ‘small and medium businesses will spend at least 70% less time completing ABS surveys’; andsecond, the ABS will be able to use and combine the collected data to ‘provide tailored reports back tobusiness to help them understand their performance against similar businesses’ (ABS nd; PMC 2022a).
Government leadership in data sharing partnerships across agencies and sectors should not be limited
to business transactions and accounting data. The National Disability Insurance Agency (NDIA) has a
Digital Partnership Program, which ‘manages controlled and secure access to some of the NDIA’s dataand systems … so providers and software developers can build new tools, applications and digital

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Box 3.3 – Examples of government and private sector digital and data partnerships
marketplaces to improve how participants, providers and the NDIA all connect and work together’(NDIA 2020). The program had 240 digital partners as at June 2022, comprising directly connected
registered providers (often larger service providers) and smaller providers that indirectly connect through‘aggregator’ software companies (NDIA, pers. comm., 10 June 2022).
Provider access to the NDIA’s application programming interfaces under the Digital Partnership Program hasenabled the streamlining of a range of National Disability Insurance Scheme (NDIS) transactions. The
provider adoption curve generally starts with lower-risk but prolific transactions, such as more visibility over
NDIS participants’ plans and service bookings, before progressing towards more complex transactions, suchas claims processes, as providers build confidence in the streamlined processes. More broadly, a Digital
Community of Interest — with over 20 organisations and members across providers, participants, peak bodies
and software developers — enables learnings and positive changes to be shared among interested parties.
The group meets multiple times a year, which provides opportunities for the NDIA to receive feedback onwhat is working and what to progress next (NDIA, pers. comm., 10 June 2022).

One area where there is opportunity to get more value from data provided to government, and increase digital
uptake across the population, is the Australian Government’s Digital Identity initiative. This is a voluntary,
centralised system for identity verification when accessing online services. Individuals create a digital identity
through accredited identity providers (including the ATO, Australia Post and Mastercard, with other providers tobe added), which set up and manage a digital identity account, and credentials such as passwords aremanaged by accredited credential providers (DTA 2022b). The system is designed to preserve privacy using
rules and standards set out in the Trusted Digital Identity Framework, with individuals sharing only relevant
details and service providers unable to seek further personal information without consent.
The Digital Identity system aims to improve convenience, as individuals no longer need multiple logins toaccess different services, and security, as identity verification is centralised so separate service providers do
not need to collect and store sensitive information such as driver’s licence and passport numbers (Bennett
and Davidson 2022; Shah 2022). Fewer reproductions of sensitive information reduces the risk of third-party
losses of personal information to security breaches. This is especially pertinent in light of sensitive data
breaches at some large Australian businesses in late 2022, such as Optus and Medibank. The head ofAustralia’s Digital Transformation Agency noted that had there been ‘a working identity system, Optus would
not have had to hang on to all the personal data that is now in jeopardy’ (Burton 2022a). These security
benefits should be clearly communicated to Australians, to encourage adoption of the Digital Identity.
The Digital Identity system has seen some good uptake recently, with more than 8.7 million individuals on thesystem as at July 2022 (Hendry 2022), up from over 6 million as at December 2021 (Robert and Hume 2021).
However, a key barrier to further uptake is the limited uses of the Digital Identity, which is currently only able to be
used as a way for individuals to verify their identity for selected services provided by the Australian Government,such as applying for a tax file number or updating business details and authorisations on the Australian Business
Register (Australian Government nd). Increasing the number of uses for the Digital Identity will also create‘network effects’ whereby more organisations accepting a digital identity will encourage more users to sign up,
which will in turn encourage more investment by organisations to accept the digital identity (Shah 2022, p. 8).
Uptake could be encouraged by allowing State and Territory Governments to use the Digital Identity forservices where they require identity verification (such as for driver’s licence applications), as well as the private
sector (such as for bank or utility account openings). The Australian Government could work with the Council

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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reporton Federal Financial Relations to improve access to its Digital Identity for State and Territory Government
services. Draft legislation required to expand the Digital Identity system was discussed and published in 2021
(DTA 2022a; Robert 2021), though it did not progress far from this point. As of November 2022, the AustralianGovernment has signalled an intention to renew its focus on the Digital Identity (Shah 2022). This could
potentially include integrating the system with the myGov mobile app to provide access to an expanded set offederal services in one environment, which could also provide a channel for further links with state government
services and the private sector (such as banking, transport and corporate services) (Burton 2022b).
Avoiding duplication of identity verification systems is also important, as having multiple systems would hinder
the consumer experience and limit the efficiency gains from a centralised system. The NSW Government isdeveloping the NSW Government Identity Strategy, which has already rolled out digital driver’s licences and will
explore the NSW digital identity separate from the federal system (NSW Government 2021). It is important for
the Australian Government to prioritise expansion of the digital identity system — and where possible learn
from the experiences of New South Wales — so that it can be used for State and Territory Government
services to avoid a proliferation of systems. The Australian Academy of Technology and Engineering has notedthat different approaches across jurisdictions can lead to inefficiencies:
When a new digital initiative commences it is important to undertake a systematic review ofexisting standards. However, this does not always occur … [for example,] digital driver’s licenses
in different jurisdictions. Application of existing standards will help minimise reinvention, … helping
create nationally consistent approaches. (ATSE, sub. 89, p. 4)

Recommendation 4.2
Expanding use cases for the Australian Government Digital Identity
The Australian Government, working with the Council on Federal Financial Relations, should increase accessto its Digital Identity so that State and Territory Government services that require identity verification (such as
applying for a driver’s licence) and private sector services that require identity verification (such as opening abank or utility account) are able to use the system, with appropriate access controls and safeguards.
Governments should work towards adopting a single national digital identity, rather than different
jurisdictions having fragmented identity systems that require citizens to verify their identity withgovernments and businesses through different channels.

Cross-sector data sharing policies
Broader data legislation and policy settings can also support collaboration and integration — or prevent it.
One example is the CDR: as discussed above, its expansion into open finance will include not only private
sector data but also customer-specific data held by government. The recent strategic assessment found that:
Prioritising the inclusion of customer data held by governments recognises that most consumer
milestone events or decisions (for example, buying a house, getting married, having a child,starting or winding up a business, or retiring) will involve a mixture of data held by private
business and government agencies about an individual or business.
… expansion to government datasets and the inclusion of government agencies as both dataholders and accredited data recipients has the potential to improve private sector goods and54

Targeting government investments and policy priorities

services, support improved Government service delivery, and support Australians and Australianbusinesses across all facets of their lives and operations. (Treasury 2022b, p. 9)
On the other hand, the Data Availability and Transparency Act 2022 (Cth) (DAT Act) does not currently allow
for government data to be shared with the private sector, including businesses and not-for-profit
organisations (box 3.1). This limits the ability for the data to be used for productivity- and welfare-enhancing
purposes, such as for policy and research or to improve products and services.
For example, some not-for-profits that deliver local community services on behalf of the government haveobserved that more data sharing and government–private sector collaboration, such as via the Act, would enable
them to improve program delivery and community outcomes (Sier 2022). The review into Australia’s response to
COVID-19 highlighted the importance of data sharing between the government and private sector in enabling thepolicy response, and recommended that private sector researchers should be allowed to access public sector
data under the scheme subject to accreditation and other controls (Shergold et al. 2022, p. 65). And participants
to this inquiry submitted that more access to government data by researchers, not-for-profits and dataintermediaries, in a secure and trusted framework, can improve our understanding of and policy response tonational challenges such as population ageing, disaster prevention and recovery, energy security and First
Nations community issues (ATSE, sub. 89, p. 3; Seer Data and Analytics, sub. 139, pp. 3–4).
Sharing government data with businesses can enable improved products and processes, better businessdecisions and innovation (PC 2017a, pp. 106–108). For instance, retailer Best Buy has used government
demographic data to develop a market segmentation strategy based on customised consumer profiles, whilein the health sector, Propeller Health created a GPS-enabled tracker that monitors inhaler usage byasthmatics from data supplied by the US Centre for Disease Control and Prevention to improve patient
outcomes (Chui, Farrell and Jackson 2014, p. 10). And the Commission has previously noted thatsuperannuation member outcomes — for those in retirement or transitioning to retirement — could be
improved by using higher quality public data to develop and price super fund products (PC 2018, p. 240).
The DAT Act does not currently allow private sector access because of the desire to balance increased data
use against privacy and security concerns (ABS, sub. 127, p. 12). Therefore, any expansion of the DAT Act
to allow private sector participation should be done gradually and with appropriate safeguards. This could,
for example, include a staged implementation, whereby access is first made available to accredited private
sector organisations using the data for policy and research purposes to achieve social objectives, before thescheme is eventually opened for businesses to use commercially. And in terms of the appropriate
safeguards, the BSA Software Alliance observed that the DAT Act’s existing accreditation framework for data
access already allows the government to make risk-based decisions on whether an entity can meet the
security and data-handling measures required to safely use the data, and that this framework could beapplied to businesses and not-for-profit organisations as well. In addition, they noted that government can
explore new privacy-enhancing technologies such as ‘homomorphic encryption, differential privacy
techniques, and federated machine learning [to] create opportunities for further sharing data while preserving
individual privacy’ (BSA, sub. 134, p. 3).
Another approach that has been applied in other countries to improve data sharing and use between
governments, companies and researchers is data labs — ‘agile implementation units with cross-functional
expertise that focus on specific use cases. Solutions are rapidly developed, tested, iterated and, once
successful, rolled out at scale’ (Domeyer et al. 2021, p. 9). For instance:• in the United Kingdom, the Ministry of Justice’s Justice Data Lab gives organisations access to thegovernment’s administrative data on criminal reoffending, enabling research on specific questions aboutrisks and rehabilitation (GovLab 2017b; MoJ 2018)55

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report• in the United States, the California Policy Lab connects government agencies with academic researchers
to answer specific policy questions using California’s administrative data, such as how to reduce
drug-related rule violations in the state’s prisons (California Policy Lab nd; GovLab 2017a).
This cross-disciplinary data sharing and use is particularly suited to solving complex economic and social
problems, such as those relating to the criminal and justice system per the above examples. The Commission
has previously observed that supporting prisoner release via ‘throughcare’ — ‘rehabilitation and reintegration
aimed at helping inmates overcome a range of complex needs and return to society… coordinated to ensure
offenders’ needs are identified and the right supports are provided’ (PC 2021a, p. 88) — would help to reduce
reoffending rates. As the necessary supports span a range of government portfolios and community service
providers (including in justice, healthcare, housing and employment services), sharing data between relevant
agencies and private organisations would assist in implementing throughcare programs.

Finding 4.12
Data sharing between public and private sectors has productivity benefits
Collaboration between government and the private sector can lead to new opportunities for digitisationand data sharing, and derive more value from data provided to government agencies. Enabling
government data sharing can benefit businesses and consumers by streamlining processes and improving
service delivery, but only if data safety and security are maintained. The Data Availability andTransparency Act 2022 (Cth) does not currently allow government data sharing with the private sector,
which could prevent some high-value data uses.

Recommendation 4.3
Private sector access to government data
The Australian Government should enable government data to be securely shared with the private sector,
so that not-for-profit organisations and businesses can undertake research and develop improved
products and services for Australians.
This could be enabled by extending the Data Availability and Transparency Act 2022 (Cth). Extension could
be gradual, starting with accredited private organisations using the data for policy and research purposes toachieve social objectives, before being opened for accredited businesses to use the data commercially.
Appropriate safeguards should be employed to ensure security and privacy concerns are addressed, and thegovernment could consider utilising advances in technology for individual privacy preservation.

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Targeting government investments and policy priorities

More value from data held by government-funded service providers
Opportunities for government-initiated data sharing extend beyond the data that is directly collected bygovernment agencies. Governments fund various investments and services that generate potentiallyvaluable data in their delivery. Even though much of this data is produced and held by service providers andusers, data that is predominantly funded by taxpayers should be available for use in generating value for thecommunity, subject to privacy and security protections.

Healthcare case study
Healthcare data is a good example of this, as the Australian Government provides significant subsidies for
Medicare-funded health services and medicines on the Pharmaceutical Benefits Scheme. The potential
productivity benefits of greater healthcare data sharing and use are well established, and can primarily begrouped into two categories (PC 2017a, pp. 522, 531):• improved service quality for the patient. Sharing data between healthcare practitioners means that it isquicker and cheaper to access accurate medical records and transfer these between practitioners, leading
to better healthcare decisions and reduction in low value care. Individual consumers recognise thesebenefits exist: the Consumer Policy Research Centre submitted that Australians ‘largely want health careproviders to have the information they need to provide quality care … 80% are ready to share their healthdata in a digitally enabled health system’ (CPRC, sub. 115, p. 7)• more informed health policy, funding allocation and service delivery. Policymakers, researchers andservice providers would have access to more accurate population health data and be able to bettermeasure health system outcomes. This could be used, for example, to improve the identification of thecauses of disease and at risk populations. Greater visibility over outcomes could also inform theevaluation of various approaches to service delivery (and the efficiency and effectiveness of these),enabling improvements and funding decisions that would potentially help service providers to deliver
quality care to more consumers.
Appropriate consideration should be given to the types of healthcare data that could be shared with and/or
through government in order to achieve these benefits. For example, improving individual healthcare
decisions and quality of care may require sharing data such as prescribed medicines and pathology test
results, so that patients can experience relatively seamless care across different practitioners and avoid theneed to repeat tests or risking prescription errors. In contrast, to achieve broader research and policy
benefits, this type of patient-specific information is unlikely to be required. De-identified data about service
use and outcomes linked across different parts of the health system (for instance, whether a patient who saw
a GP was treated or had to subsequently engage with specialists or hospitals) might be more useful.
The benefits of data sharing must also be balanced against safety and privacy concerns. For example, eventhough the government provides significant funding for healthcare, their right to data from publicly funded
health services may not include written medical records created by a practitioner. These are covered by both
copyright and privacy laws, with patients having some rights to access the records. However, it is far fromclear that government access to these records (at this time) would create social benefits that outweigh thecosts — including the costs of practitioners potentially reducing the amount of useful information they include
in these records.
The Australian Government’s My Health Record (MHR) initiative is intended to provide a mechanism for collating,storing and sharing consumer health information (box 3.4). However, despite increased uptake over recent years,
MHR is some way off from being a comprehensive source of information on all healthcare services used by aconsumer. This, in turn, limits the benefits that can be achieved for both individuals and the community.
Interoperability between the data collection and storage systems of different healthcare providers and data users
has been an ongoing barrier to MHR take-up, including in the aged care sector. For example, a 2021 survey ofresidential aged care providers by the Aged Care Industry Information Technology Council found that 71% used57

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

software that does not interface with MHR (Health Metrics 2021). More broadly, the Commission observed in its
Innovations in Care for Chronic Health Conditions report that ‘many of the IT systems that GPs use are notinteroperable with hospital IT systems, limiting communication and information sharing between these two
sectors’ (PC 2021b, p. 118). In an environment where caregivers and medical practitioners are often time poor,
the additional time required to navigate systems that do not interface with other data sources — or to change theirsystem to enable interoperability — can be a significant barrier to better data use.

Box 3.4 – Use of My Health Record
The Australian Government introduced My Health Record (MHR) in July 2012 to improve consumer
health data sharing. Initial uptake of MHR was slow, as it was opt-in until January 2019 and many
medical practitioners and software providers were not well prepared to use MHR. In MHR’s early years,
slow uptake begat slow uptake as ‘low usage throughout the healthcare system reduced the incentive forindividual clinicians to use MHR. For example, patchy usage by [general practitioners (GPs)] meant that
hospital staff saw little value in using MHR and vice versa’ (PC 2021b, p. 119).
Since MHR was changed from opt in to opt out, the number of records with data has increased
substantially, from 5.4 million people in January 2019 to more than 22.5 million in March 2022
(ADHA 2022). These records include 245 million clinical documents (such as those uploaded byhospitals, pathologists and radiologists) and 362 million medicine documents (such as those uploaded by
GPs and pharmacists), with the volume of uploaded documents increasing by more than 50% over the
past year for most document types (figure below). Early feedback from medical practitioners after theshift to an opt-out approach was mixed, with the Royal Australian College of GPs observing in July 2019:‘has Australia’s digital health repository hit the threshold for usefulness? Some GPs give an emphatic
yes, while others say it is still a work in progress’ (Hendrie 2019). The continued growth of data stored in
MHRs is likely to have increased its usefulness to consumers and service providers.
Data in My Health Record has increased significantly
Volume of documents uploaded by document type, March 2022
400

120

350

100

300
80

250
200

60

150

40

100
20

50
0

0
Clinicaldocuments

Medicine
documents

Pathology
reports

Dispense
records

Volume uploaded as at Mar 2022 (millions, LHS)

Source: ADHA (2022).

58

Discharge
summaryreports

Diagnostic
imaging reports

Increase over past year (%, RHS)

Targeting government investments and policy priorities

Box 3.4 – Use of My Health Record
However, despite the increased uptake, MHR is some way off from being a comprehensive source ofdata on all healthcare services used by a consumer. In addition to individuals being able to opt out,
healthcare providers can also choose not to enter consumer data into a MHR, even if the individual has
opted in. As such, the amount of detail contained within individual MHRs is variable; for example,
although 99% of GPs are registered on the system, GPs report that one in 25 MHRs currently contain nodata at all (Attwooll 2022).
Registration and usage is still low in parts of the system: as at March 2022, only 22% of specialists areregistered on MHR and 10% have used it (ADHA 2022). And only 10% of residential aged care facilities
were registered as at April 2021, with only 3% having used it (Cheu 2021). Given the potential benefits ofconsolidating health data for aged care residents, the Aged Care Royal Commission recommended‘universal adoption by the aged care sector of digital technology and My Health Record’ by July 2022,
including that all providers use a digital care management system that is interoperable with MHR(Pagone and Briggs 2021, p. 253).

There have been efforts to improve health data collection, sharing and interoperability outside of MHR.
• The Australian Government’s Practice Incentives Program Quality Improvement (PIP QI) Incentive pays GPs
up to $50 000 per year to collect and submit data about specific improvement measures to their local primary
health network (PHN). The data is used to ‘benefit patients directly at the practice level and to inform PHN
regional planning and contribute to national health policy’ (Department of Health 2019, p. 5). The
Commission has previously reported ‘mixed views from stakeholders on the PIP QI. Some considered it has
encouraged practices to improve their data collection … However, others argued the data requirements were
too low and would not lead to substantial improvements in quality of care’ (PC 2021b, p. 150). The Practice
Incentives Program also has a specific eHealth Incentive (ePIP), which rewards GPs that meet certain digital
health requirements such as having an electronic secure messaging capability, sending the majority of theirprescriptions electronically and using compliant software to participate in the MHR system (including
uploading a minimum number of shared health summaries each quarter) (ADHA nd).
• Some states and territories have implemented health data initiatives in their own jurisdictions.
– In Queensland, all referrals from GPs to public hospital specialists are made electronically through the
Smart Referrals initiative, which was established under the 2016 Specialist Outpatient Strategy(Queensland Health 2016) to improve follow-up care, lower wait times and reduce human error. Digitalreferrals are integrated with existing GP software and can be tracked across the state.
– In New South Wales, the Lumos program links GPs’ primary care data with other health system datasuch as from emergency departments, hospital admitted patients, non-admitted patients andambulances. It became a state-wide program in 2020 and, although not all GPs are on board, over 500
practices from across all 10 NSW PHNs are participating (NSW Health 2021).
– In the Northern Territory, the Chronic Conditions Management Model requires all NT Health clinics to
upload consumer data in electronic records. The data is cleaned and turned into automated reports thatare provided back to practitioners to inform subsequent decisions about preventing and managing
chronic health conditions (PC 2021b, pp. 123–124).
– In Victoria, the Health Legislation Amendment (Information Sharing) Bill 2021 (Vic) seeks to establish acentralised electronic database for hospitals, ambulances and other healthcare providers to sharepatient data (Parliament of Victoria 2021). It would be mandatory for data to be shared in the database59

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report(that is, patients are unable to opt out), which medical practitioners have noted is an important featurefor generating benefits for patients and the broader system, and that ‘the benefits outweigh the [privacy]risks’ (Estcourt and Eddie 2022).
While these have improved data use, individual initiatives that only cover parts of the health system orparticular jurisdictions are not sufficiently comprehensive or interoperable to result in increased service
quality for all consumers, or enable more informed health policy development and resource allocation on alarge scale. The Australian Healthcare and Hospitals Association submitted that past efforts to bring together
primary healthcare data had similar limitations: ‘in the absence of a national minimum dataset for primary
healthcare, none [of the previous initiatives] have been comprehensively successful’ (AHHA, sub. 27, att. 1,
p. 16). And Bupa observed that to incentivise best practice in healthcare, ‘we need to accelerate
implementation of strategies for increased interoperability of health data. To improve service planning andoutcomes it is essential that more data of higher quality is made available across both the public and private
systems’ (Bupa, sub. 69, p. 11).

Finding 4.13
Data from government-funded services could be better used
Much of the data generated by government-funded services and investments is not currently shared. But
there could be large benefits resulting from better use of this data, subject to appropriate data security andprivacy safeguards. For example, in health, data sharing can lead to improved services as providers haveaccess to more accurate medical records and policymakers make more informed decisions.

Building on current foundations to improve health data sharing
The government should support more health data sharing, given the potential benefits that can be realised
from greater use of this data and the significant policy levers that the government controls in funding anddelivering health services. MHR could be a starting point for this — while it is currently not a complete sourceof health data on an individual patient (box 3.4), the underlying MHR infrastructure (including governanceand security settings) can provide the foundation for a system in which data is shared more comprehensively
and used to improve patient and sector-wide outcomes. Several government actions would encourageincreased health data sharing using MHR, building on its current foundations.
First, there should be more clarity about opting out of MHR participation and what this entails for patients andpractitioners. While patients have the right to opt out, the government should clarify that practitioners are
required to upload relevant health information to MHR for patients who have not opted out of participating.
The definition of ‘relevant’ information should be determined by government in consultation with patients andpractitioners, and should be based on what information is most beneficial for informing patient care andenabling practitioners to improve health service delivery; for example, pathology and diagnostic imaging
results and prescribed medications. Given that patients who have opted out of MHR could be missing out on
significant improvements in the quality of the health services they receive, they should be required to confirm
their decision to opt out each year after discussing with their GP.
Second, the government should support initiatives that make it easier for practitioners to upload information
to MHR. Different healthcare practice management software has different functionality in how patient
information can be entered and used, and not all software is integrated with the MHR system.

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Targeting government investments and policy priorities• In the short term, the government could publish a list of available software that can directly interface with
MHR; for example, by allowing practitioners to automatically upload data to the MHR system when it isentered into a patient’s record at the practice. This will enable practitioners to easily identify whichsoftware options could provide a more streamlined approach to interacting with MHR, and minimise
unnecessary administrative burdens. The Australian Digital Health Agency (ADHA) already publishes aregister of medical software products that conform with ePIP requirements (discussed above), including
MHR-compatible software (ADHA 2021). This could be expanded to software that is used by other typesof healthcare practitioners (as ePIP is a GP-only program), and with additional information about softwarefeatures — the ATO’s register of STP-compliant products, which is discussed above and includes details
about each product’s functionality and target market, could be a useful example to follow. Incentives tomigrate to MHR-compliant software products could be considered for other healthcare practitioners
beyond GPs, who can already benefit from ePIP.
• In the medium term, the government can address the broader interoperability issues in health datacollection and storage (discussed above) by setting conformance standards for all medical practice
software providers. These standards should require that practitioners can automatically upload relevant
records to MHR via the software, and allow them to extract their patient data in an easy-to-use format toenable analysis at the practice level and transfer between software providers. The standards should also
cover a consistent language and terminology, and a secure gateway to enable practitioners using different
software to connect with each other. This could build on work already underway by the ADHA indeveloping ‘terminology and information exchange standards to support the interoperability of digital
health systems’ (ADHA, sub. 145, p. 2).
Third, while MHR is already a secure environment for sharing patient data and is managed according to theAustralian Government Protective Security Policy Framework, trust and confidence in the system can only bemaintained if these security settings are continually monitored and updated. The government should review
MHR’s security measures on an ongoing basis to ensure that they remain fit for purpose in a rapidly evolving
security threat environment.
The ultimate goal is to have a MHR system that allows comprehensive and seamless sharing of relevant
health data between all practitioners that are providing care for an individual patient, as well as empowering
patients by enabling them to access their own complete health record. Implementing the above steps would
get some way towards this end goal: the benefits to patients and practitioners are significant, the systemsafeguards would be in place, and enhanced software functionality would reduce barriers to participation.
But there may be some practitioners that would still not be willing or able to upload patient information into
MHR (for example, those that do not use practice management software and maintain paper records). This
final ‘tail’ of practitioners may require some additional education and assistance and, as a last resort,compulsion to share relevant information for the benefit of their patients, particularly for service providers thatreceive government funding. For example, there have previously been suggestions that government could
mandate that some health information be uploaded into MHR, ranging from pathology and diagnostic
imaging results (Attwooll 2022) to patient outcomes and service provision data from all practitioners receiving
government funding (AHHA, sub. 27, att. 1, p. 18). Given that buy-in from both practitioners and patients is
an important factor underpinning use of and trust in MHR, mandating data sharing should be considered by
the government as a last resort in weighing up the benefits and costs of system use.
The requirement to make healthcare data available to other practitioners and patients may change thenature of that data. Survey evidence from US mental health practitioners suggests that, when patients are
given open access to their medical records through the OpenNotes software package, physicians change
the tone and reduce the detail of their notes (Moll and Cajander 2020). And in Sweden, psychiatric carepractitioners were found to be less candid with their notes (Petersson, Erlingsdóttir, and others 2018) and61

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

oncology professionals noted changes to documentation practices, though this did not appear to havesizable negative effects on patient outcomes (Dobscha et al. 2016). Conversely, a review of empiricalstudies did not suggest that increased patient access to records through OpenNotes induced substantialchanges to medical records (Blease, Torous and Hägglund 2020, p. 3). This indicates that the effect of more
health data sharing on medical records (and patient outcomes) is, at best, unclear. However, as therequirement to share some healthcare data with patients may interact with documentation practices andtherefore treatment (for example, where mental health records may themselves lead to patient trauma), there
may be a small set of health records that require special conditions for sharing through MHR.
Finally, while the above discussion about implementation has focused on using MHR to improve service
quality at an individual patient and practitioner level, the data in the MHR system could also be used to
inform health policy and service planning, and disseminate best practice across the health sector. For
example, data from primary care providers can help to ‘facilitate increased efficiencies in care delivery,
create more proactive preventive interventions, identify at-risk populations, inform health strategy andplanning, support quality-improvement initiatives in Australian general practice and support judiciously
targeted investment’ (RACGP 2022, p. 19). The ADHA submitted that the size and quality of the MHR
database means that ‘it is a powerful resource to identify, support and monitor progress in vulnerable
communities and cohorts … provid[ing] a more holistic view of patient’s lives and support[ing] theidentification of structural, social, economic, and cultural determinants of health’ (ADHA, sub. 145, p. 6).
Using MHR to inform service planning and policy development would require a broader framework, as it iscurrently used for sharing individual patient records and the system’s governance and safeguards are set up
for that purpose. This would require extensive consultation with practitioners and the community on how thedata could be de-identified and analysed for policy and planning purposes, in a way that maintains individual
trust in MHR while also benefiting the broader system. For example, the Office of the Australian Information
Commissioner has produced guidance on de-identification in collaboration with the CSIRO’s Data61, andnoted that ‘appropriate de-identification may be complex, especially in relation to detailed datasets that may
be disclosed widely and combined with other datasets’ (OAIC, sub. 173, p. 5). Following the analysis,
system-level benefits may then lead to further benefits at the individual practice and patient level, if theanalysis was able to be fed back to the practice and re-linked to patients. This could involve retaining thelinking identifier at the practice level to preserve anonymity in the system-level analysis.

Beyond healthcare
The rationales discussed for healthcare data apply more generally for increasing data sharing from othergovernment-funded investments and services in sectors such as school education, childcare, aged care,criminal justice, community services and infrastructure contracts. In each case, the government would needto meet legitimate privacy and security concerns held by individuals and ensure that private data collection is
not undesirably distorted by the data sharing initiative.
Large productivity and welfare gains could potentially result from better use of the data produced in each ofthese areas. As in the case of healthcare, these include benefits to individual consumers from improved
service quality, and system-wide improvements arising from more informed resource allocation and researchand policy development. One example of individual benefits is that sharing and linking service use data heldby government-funded community services providers in areas such as housing and employment services
could help to provide released prisoners with appropriate supports upon their return to the community. And
at the system level, greater availability of data on childcare and education outcomes can help to inform policy
decisions about funding allocation and effective service delivery.

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Targeting government investments and policy priorities

Healthcare should therefore be only the starting point for the government in supporting more data sharing bygovernment-funded service providers, to enable linked and seamless service delivery in other sectors.
Depending on the sector and the existing (public and private) settings in place for collecting and using data,
the government could play useful roles such as identifying relevant data to be shared and linked to benefit
individuals, or setting technical standards for data sharing to promote interoperability — as suggested abovein health. There may also be opportunities for government to use its funding levers to incentivise service
providers to gather and share new data that could facilitate improved service delivery and productivity, suchas data on service quality that is not currently collected.

Recommendation 4.4
Sharing data from government-funded services
The Australian Government should increase the safe sharing and use of data collected by governmentfunded service providers, including community, not-for-profit and private organisations. This would include
identifying relevant data that could be safely shared and linked to benefit individuals receiving services,setting technical standards for data sharing to promote interoperability, and using funding levers toincentivise service providers to gather and share data that could improve service delivery and productivity.
Healthcare data should be targeted in the first instance to enable wellbeing benefits for individuals andproductivity benefits at the practitioner and system levels. This could be implemented using My Health
Record (MHR) as the foundation for a comprehensive data sharing system, and include provisions for:• opting out of the system: Where consumers have not exercised their right to opt out of the system,
practitioners should be required to upload agreed relevant health records to MHR. Patients that opt out
should be required to confirm their decision each year after discussing with their general practitioner• health software compatibility and standards: In the short term, the Australian Government should publish aregister of health practice software that is integrated with MHR. In the medium term, it should set
conformance standards that require all health practice software to be compatible with MHR to enable
ready uploading of relevant records to MHR and extraction of patient data in an easy-to-use, secure andtransferable format. The standards should also include consistent language and terminology, and asecure gateway to enable practitioners using different software to connect with each other• de-identification to support system planning: The Australian Government should, in consultation withhealthcare practitioners and the community, develop a framework for using the data in MHR in a deidentified way for health system-wide planning and policy development.
To support seamless service delivery, safe sharing of data held by government-funded service providers
outside of healthcare — such as school education, childcare, aged care, criminal justice, community services
and infrastructure contracts — should also be investigated and facilitated by the Australian Government.

3.3

Developing digital, data and cyber security skills

Demand for specialist digital and data workers is high across the Australian economy, not just in thetechnology sector, as ‘digital skills is one of the most important drivers of future prosperity’ (ATSE, sub. 8,p. 2). While the reported size of the ‘tech workforce’ in Australia varies depending on the occupations thatare classified as working in digital and data-related roles, several industry associations have estimated that
there are now over 800 000 workers employed in ‘tech jobs’ (ACS 2021a; TCA 2022). This includes highly63

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reporttechnical workers such as software developers and data scientists, as well as roles that support the adoption
and experience of digital and data-related services by others (such as business analysts, technology productmanagers and user experience designers).
Many of these specialist workers are not employed by technology companies, or even consultancies that advise
on digital and data solutions, but instead by businesses in other industries. For example, in the 2021 Census, lessthan half of all ICT managers and ICT business and systems analysts worked in the technology-related industries
of information media and telecommunications or professional, scientific and technical services (figure 3.5). About
40% of software and applications programmers were employed outside these industries.
Figure 3.5 – Many technology workers are employed in other industries
Share of workers in selected ICT occupations employed in technology-relatedindustries, 2021a
100
90
80
70
60
%

50
40
30

20
10
0
ICT Managers

ICT Business and Systems
Analysts

Technology-related industries

Software and Applications
Programmers

Other industries

a. Technology-related industries are the ‘information media and telecommunications’ and ‘professional, scientific andtechnical services’ industries.
Source: ABS (Population Census, 2021).

As the Australian economy becomes increasingly digitised — a trend accelerated by the COVID-19
pandemic — demand for these specialist digital and data workers is expected to grow. In 2021, technology
occupations on the then-National Skills Commission’s (NSC’s; now Jobs and Skills Australia) skills priority
list were more than twice as likely to have ‘strong’ expected future demand in the next five years comparedwith the forecasts across all occupations on the list (figure 3.6). Industry also expects rapid growth in labourdemand, with the Australian Computer Society forecasting that there will be demand for 1.2 million
technology workers by 2035 (ACS 2021b, p. 6) and the Tech Council of Australia targeting technology
employment of almost 1.3 million workers by 2030 (IA 2022a, p. 2).

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Targeting government investments and policy priorities

Figure 3.6 – Strong future demand is projected for digital and data-related jobs
Share of occupations on the NSC’s skills priority list with high current and future
demand, June 2021a,b
80
70
60
50
%

40
30
20
10

0
Share with current shortages

Share with strong future demand

All occupations on skills priority list (n = 799)

Digital and data - related occupations (n = 32)

a. The skills priority list includes occupations at the 6-digit ANZSCO level. The 32 occupations included as digital and data
related are: Chief Information Officer, ICT Project Manager, ICT Trainer, ICT Account Manager, ICT Business Development
Manager, ICT Sales Representative, ICT Business Analyst, Systems Analyst, Multimedia Specialist, Web Developer,
Analyst Programmer, Developer Programmer, Software Engineer, Software Tester, Database Administrator, ICT Security
Specialist, Systems Administrator, Computer Network and Systems Engineer, Network Administrator, Network Analyst, ICT
Quality Assurance Engineer, ICT Support Engineer, ICT Systems Test Engineer, Telecommunications Engineer,
Telecommunications Network Engineer, Hardware Technician, ICT Customer Support Officer, Web Administrator,
Radiocommunications Technician, Telecommunications Field Engineer, Telecommunications Network Planner, andTelecommunications Technical Officer or Technologist. b. Future demand is based on the NSC’s five-year employment
projections, which combine forecasts from autoregressive integrated moving average and exponential smoothing withdamped trend models, with known future industry developments and other NSC research.
Source: NSC (2021a).

The skills priority list reported that the share of technology occupations in current shortage was broadly
similar to the overall list in 2021. Analysis by the Tech Council of Australia using job ads data from Indeed,an online job search platform, suggests that the average age of open technology job ads (at 45 days) ishigher than the economy-wide average (40 days). There are some particularly specialised roles that takelonger to fill — such as in robotics, cyber security and niche engineering and developer roles (figure 3.7). In
stakeholder engagement undertaken by the NSC, employers experiencing current challenges hiring relevant
digital and data skills stated that:…where there was recruitment difficulty, this was experienced nationally, and that particulardifficulty was experienced recruiting for experienced positions. Reported recruitment difficulty wasmost often attributed to the lack of technical skills or qualification of applicants, a lack of suitableor experienced applicants, or the specialised nature of roles. … The most frequently mentioned
challenge facing recruitment in these occupations in the future is the lack of a locally trained
workforce. (NSC 2021b, p. 5)65

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Figure 3.7 – Specialist digital and data roles take longer than average to fill
Weighted average age of open job ads, 30 September–1 October 2021a
70
60

Days

50
40
30
20
10
0

Tech jobs average

Economy-wide averagea. This analysis by the Tech Council of Australia used job ads data from online job search platform Indeed. The numberof open ads was collected for each job and segmented based on days since posting (7, 28, 56, 84, 102, 130 day
buckets). The weighted average age was calculated by multiplying the share of job ads open within a particular timebucket by the midpoint between the minimum and maximum days of that bucket.
Source: Tech Council of Australia (pers. comm., 31 May 2022).

Specialist digital and data skills from formal education and training
Universities provide one pathway for digital and data skills development, and information technology (IT)degree completions have steadily increased over the past decade, rising particularly strongly in recent years(figure 3.8). While IT degree completions have increased for both domestic and international students, thelatter group experienced significantly faster growth, with an average annual growth rate of 27% between
2016 and 2020 (compared with 12% for domestic students). As the latest available data on university degreecompletions predates the greatest disruptions caused by COVID-19, the pandemic’s total impact on IT
degree completions by international students remains to be seen.

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Targeting government investments and policy priorities

Figure 3.8 – IT university degree completions have increased over the past decade
IT university degree completions by qualification level and citizenship category, 2001
to 2020a
35 00030 00025 000
20 000

15 000
10 0005 000
0Domestic postgraduate

Domestic undergraduate

International postgraduate

International undergraduate

a. The Department of Education, Skills and Employment changed the format of its completions data publication in 2020.
Completions data for 2016 to 2020 is from the Award Course Completions Pivot Table, while data for 2001 to 2015 isfrom the Higher Education Data Cube (uCube).
Source: DESE (2021, 2022).

The share of IT university graduates in Australia is relatively high compared with many other countries, with
6% of tertiary education graduates completing studies in information and communication technologies —higher than in the United States, United Kingdom, Canada and various European countries (figure 3.9).
However, this does not necessarily translate to a larger pipeline of specialist digital and data workers inAustralia. Industry stakeholders observe that ‘approximately 1 in 2 of these international [IT] students do not
permanently migrate to Australia, which means that our high enrolments overstate the impact that Australia’s
universities have on training our tech workforce’ (TCA 2022, p. 5).
There have been approximately 20 000 annual completions of IT programs in the vocational education andtraining (VET) sector in recent years, with a growing share of these being international students (up from 10% in2016 to 28% in 2020; figure 3.10). Post-study outcomes for students completing IT VET programs are relatively
poor — in 2021, 73% reported that they were employed or in further study after completing their IT VET course,
compared with 86% across all fields of education (NCVER 2022). However, students who are able to findemployment in the technology sector after their VET studies perform relatively well, with the average wage gap
between a VET qualification and a bachelor’s degree being only 3% for entry-level roles, compared with 15–17%
for entry-level workers in alternative industries (TCA 2022, p. 10).

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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Figure 3.9 – Australia has a relatively high share of ICT graduates
Share of tertiary education graduates graduating from ICT programmes, 2019
Italy
Belgium
Switzerland
Netherlands
FranceUnited Kingdom of Great Britain and Northern Ireland
NorwaySwedenUnited States of America
CanadaAustria
Germany
Republic of Korea
MexicoDenmark
India
Russian Federation
Australia
United Arab Emirates
New Zealand
Saudi Arabia
Malaysia
Finland
Estonia
Singapore
0

1

2

3

4

5
%

6

7

8

9

10

Source: UNESCO (2021).
Figure 3.10 – Domestic IT VET program completions have declined, while international
completions have increased
VET completions in the IT field of education by citizenship category, 2016 to 2020
25 000

20 000

15 000

10 000

5 000

0

2016

Source: NCVER (2022).

68

2017

2018

2019

Domestic students

International students

2020 (preliminary)Targeting government investments and policy priorities

Short courses for digital and data reskilling and upskilling
Not everyone seeking employment in technical digital or data roles wants to complete an undergraduate or
postgraduate degree — for example, individuals who are already in the workforce might want to transition
into a specialist technology job from an adjacent role, without spending years returning to study. Other, more
flexible, methods for upskilling or reskilling are required so that these workers can fill gaps in their technicalknowledge while continuing to utilise relevant capabilities developed through their prior work experience. The
Tech Council of Australia has stated that ‘reskilling and upskilling workers must become the primary way
tech jobs are filled’ in order to meet future demand for specialist technology workers (TCA 2021b, p. 3).
There are a range of reskilling and upskilling options available for workers to develop the specialist digital ordata capabilities required to transition into a technical role. Alternatives to a formal full-length qualification are
offered by various organisations, and enable workers to ‘obtain targeted skills or knowledge in a shorter
timeframe and at a reduced cost relative to traditional tertiary education’ (ACS 2020, p. 35).
• Vendor certifications are provided by companies that offer software or data services to train users of thoseservices. Examples include Cisco’s certifications across a range of technology categories (such as
security, enterprise and DevNet) and levels (from entry level up to expert) (Cisco 2022); Microsoft’s 200+
certifications in areas such as its Azure cloud services and security solutions (Microsoft 2022); andAmazon’s certifications ranging from foundational Amazon Web Services cloud knowledge through to
specialty domains in machine learning, advanced networking and databases (AWS 2022).
• Tertiary education institutions have set up separate entities that offer short courses targeted at developing
specific digital and data skills. For example, RMIT Online has 6–16 week online courses to develop
technical skills such as AI programming, app design and data analytics (RMIT 2022).
• Various learning platforms offer shorter courses for workers to develop technical skills. For instance:– Some companies deliver their own education and training courses in specialist digital and datacapabilities, such as General Assembly’s immersive courses in software engineering, data science anduser experience (General Assembly 2022) and Academy Xi’s online courses in digital productmanagement, web development and data analytics (Academy Xi 2022)– Online education providers are collaborating with companies to offer new training options. For example,
Google has partnered with Coursera to launch three professional certificates in data analytics, project
management and user experience design, while Microsoft and General Assembly have a partnership todevelop scalable AI training solutions (Coursera 2021; Microsoft 2019). Outside of big technology
companies, Udacity has worked with AT&T and Shell to create tailored courses in ‘hard-to-source,
in-demand skills sets’ such as web development and data science (AT&T) and artificial intelligence(Shell) (WEF 2020b, p. 48).
Women are more likely than men to enter the tech workforce through a reskilling pathway, by moving fromanother sector into a specialist technology role in their early to mid-career (TCA 2022, p. 5). In contrast, men
are more likely to enter the tech workforce directly from education or training at the start of their career, andthen move jobs within the sector. Greater use of these shorter and more flexible learning options to develop
technical digital and data skills could therefore help to lift female participation in specialist technology roles,
as only 1 in 4 workers in Australia’s tech sector are women (TCA 2022, p. 1).

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Employers with digital and data skill needs can also prefer shorter-form learning options offered by industry
providers, compared with the formal qualifications delivered by universities and the VET sector. Industry-delivered
training — such as vendor certifications — are viewed by some employers as developing more relevant skills than
the formal education system: employers state that these vendor training options are ‘”focused and tailored”,“cutting edge”, “very relevant”, “highly flexible” [and] “great value for money”’ (Bowman and Callan 2021, p. 46).
Shorter-form learning options could be particularly useful for SMEs — which are more likely to cite lack of skills as
a barrier to technology adoption (section 2.1) — to build digital and data capabilities, as the financial and time
costs of training are relatively high for these employers (OECD 2021, p. 10).
Surveys of IT industry employers routinely find that they are more likely to use unaccredited training than the
average use across all industries (figure 3.11). And in 2021, 83% of employers in the information, media andtelecommunications industry that used unaccredited training reported satisfaction with training to meet their skill
needs, compared with only 58% of employers using nationally recognised training (NCVER 2021).
Figure 3.11 – Employers in the IT industry are more likely to use unaccredited training
Share of employers using unaccredited training in the past 12 months by industry, 2013
to 2021
70
60
50

40
%
30
20
10
0
2013

2015

2017

Information media and telecommunications

2019

2021

All industries

Source: NCVER (2021).

The private benefits associated with these training options means that many are already being taken up by
Australian workers and businesses. In addition to the private benefits, some governments have also
introduced initiatives aimed at encouraging workers to upskill and reskill in digital and data using shorttraining courses. For example, Victoria’s Digital Jobs program supports 5000 mid-career employees toundertake 12 weeks of industry-backed training, followed by 12 weeks of work experience in a digital role
(DJPR 2022). At the national level, the Digital Skills Organisation launched a pilot project to train 100 data
analysts, with participants undertaking short unaccredited training tailored to employers’ needs on digital anddata skills, and funding incentives tied to training completion and employment outcomes (DSO 2021).
Several inquiry participants suggested that the government should provide further financial incentives for
digital and data-related short courses — such as micro-credentials and ‘boot camps’— for upskilling andreskilling purposes (for example, Australian Investment Council, sub. 83, p. 7; BSA, sub. 134, p. 5;
Engineers Australia, sub. 85, p. 14; UTS, sub. 92, p. 2). Government support for these types of courses and70

Targeting government investments and policy priorities

lifelong learning among Australian workers more generally is discussed in the inquiry’s companion volume
From learning to growth, which recommends that the government could encourage uptake by trialling
targeted policies for work-related upskilling and reskilling, and extending self-education tax deductions to
education that is likely to lead to income outside of current employment. Existing programs designed tosupport lifelong learning, such as Employability Skills Training and the incoming Skills and Training Boost,should also be evaluated for their effectiveness at facilitating additional training.
Shorter-form and unaccredited training will not always be the most suitable option for workers looking to reskill or
upskill into a technical digital or data role. RMIT Online, a provider of both short courses and full-length
qualifications in various specialist digital and data areas, notes that ‘while short-term training may be enough inmany cases, if people are looking for a career change or a brand new, complex skillset, longer-term andstructured education by a tertiary institution may be needed’ (RMIT Online and Deloitte Access Economics 2021,
p. 25). The most efficient channel for reskilling or upskilling will depend on an individual’s previous education andwork experience and the skills that need to be developed in transitioning to a new technical role.

Finding 4.14
Shorter-form learning options help develop digital and data skills
Short courses and unaccredited training can be preferred for developing digital and data skills, as they areoften more relevant and flexible. Businesses and workers are already using options such asindustry-delivered vendor certifications to upskill and reskill, and government support (such as through tax
incentives) could further increase uptake where policies are targeted and evaluated for additionality.

Supplementing the local workforce with overseas experience
Not all skills gaps in specialist digital and data capabilities can be filled through education and training. The
then-National Skills Commissioner previously stated that there can be a range of factors that result indemand exceeding supply for specific skills, particularly in the short term, including employers desiring:… on the job experience, things that are difficult to provide through formal training alone; [or] ahighly technical or specialised skill which is emerging and hence might not yet be reflected in the
training system. (Boyton 2022)
Various advanced technical skills in the digital and data space are likely to fit this description. For example,
technology product managers — who combine business, technical and user experience skills to oversee a
product’s development in a way that meets customers’ needs — for large-scale products are difficult to findin Australia. Industry stakeholders report that people who have the capabilities to manage products at scalelearn by doing. With a relatively small (though growing) number of technology companies operating at alarge enough scale in Australia, there is a relatively small talent pool to meet employers’ demand forexperienced product managers in the short term. Some have noted that ‘if Australia wants to improve its
technology industry, the discipline of product management “needs to grow up a little bit”’ (Gillezeau 2020).
Because of the importance of on-the-job experience in developing these types of specialised skillsets, many
employers look to recruit workers from overseas where there is a deeper talent pool. This targeted sourcing
of workers from overseas is used not only to fill immediate skills gaps, but also to support the longer-term
development of the workforce in Australia. For example, overseas workers join local teams and are able tobring their experience to support on-the-job learning for local employees. As technology products are scaledup, these local workers can further develop more advanced technical skills on the job.
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Some businesses operating internationally have work-from-anywhere policies, which enable them to hire
specialist digital and data workers in other countries and integrate them with their Australian teams. This
distributed workforce approach has increased through the COVID-19 pandemic; for example, Atlassian
introduced its ‘Team Anywhere’ policy in 2020 and transitioned to a fully distributed workforce(Atlassian 2022). The Commission heard from both large and small Australia-based technology companies
that they are able to tap into overseas skilled workers by building integrated teams comprised of local staff
and employees in North and South America, Europe, Asia and Africa.
Skilled migration is another channel for Australia-based businesses to access the global talent pool for
specialist digital and data skills. There are several options for overseas workers with these skills to acquire avisa for employment in Australia.
• The Temporary Skill Shortage (TSS) visa (subclass 482) is ‘important for technology companies of all
sizes’ (TCA 2021a) as a source of workers with advanced technical skills that are difficult to recruit inAustralia. It includes short and medium-term streams that require workers to be sponsored by an
employer for an occupation that is on a relevant skilled occupation list (Home Affairs 2021d). As at end
February 2022, specialist digital and data occupations eligible for the short-term stream included software
testers and web developers, and eligible workers for the medium-term stream included developer
programmers and software engineers (Home Affairs 2021c).
• The Global Talent (Independent) visa (subclass 858) seeks to attract highly skilled workers across ten
target sectors, including ‘DigiTech’, ‘Agri-food and AgTech’ and ‘Financial Services and FinTech’. These
respectively represented 34%, 12% and 1% of the 9 584 visas issued in 2020-21 (Home Affairs 2021a,
p. 37). There are 15 000 visa places available under this program in 2021-22 and workers do not need tobe employer sponsored (Home Affairs 2021f).
• The Global Talent (Employer Sponsored) program allows employers to sponsor workers with specialised
skills that are not eligible for other visas (such as the short and medium-term streams of the TSS visa).
Visas are issued under the labour agreement stream of the TSS visa and accredited employers are not
restricted to occupation lists (Home Affairs 2021e). Several technology and data-related employers wereaccredited as at end February 2022, including Amazon, Culture Amp and Refinitiv (Home Affairs 2022b).
Several stakeholder submissions noted that the approach of using skilled occupation lists for some of thesevisas could be improved, as this would better enable employers to address local digital and data skills needs(AIC, sub. 71, p. 11; Consult Australia, sub. 28, p. 9; TCA, sub. 51, p. 16). In particular, the Tech Council ofAustralia observed that ‘Australia’s skilled occupation list is arbitrarily complex and outmoded, due to its
reliance on an occupation classification system that does not recognise tech sector roles’ (TCA, sub. 51,
p. 16). Some inquiry participants suggested that the government should review skilled migration policy
settings to better attract and prioritise workers with the digital and data skills that are currently in highdemand across Australian employers (ACCI, sub. 175, p. 13; CPRC, sub. 115, p. 8).
The companion volume in this inquiry, A more productive labour market, discusses migration policy moregenerally and includes several recommendations to improve Australia’s skilled migration program, such as
shifting away from overly restrictive and inflexible occupation lists for employer-sponsored temporary andpermanent skilled migration. Instead, the government should implement wage thresholds for employersponsored visas, whereby employers can sponsor overseas workers in any occupation as long as they arepaid above the relevant threshold (with a lower threshold for temporary migration and permanent migrationthresholds to increase with age). Implementing such changes would improve the ability of Australian
employers to supplement their workforce with specialist digital and data skills from overseas that are difficult
to source or develop locally in the short run.

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Finding 4.15
Skilled migration assists in meeting digital and data skills needs
Not all digital and data skills needs can be met locally or with education and training in the short term.
Skilled migration enables businesses to access a deeper talent pool, particularly for specialist skills thatare difficult to find or develop in Australia. However, the occupation lists that underpin much of the skilledmigration system are not sufficiently flexible or up-to-date to meet employers’ digital and data skills needs.

Increasing digital literacy among the broader population
In addition to the specialist technology and data workers that are in high demand, an increasingly digitised
economy and society — as discussed in section 1.1 — means that most Australians need some level ofbaseline digital skills (sometimes referred to as ‘digital literacy’) in order to work and live. The AustralianGovernment’s Digital Economy Strategy 2030 reported that 87% of jobs now require digital skills – acrossevery sector and industry (PMC 2021c, p. 16). The Smith Family has observed that a lack of basic digitalskills in some population cohorts has flow on effects to their ability to participate in a high-skilled 21st century
economy (The Smith Family, sub. 26, p. 15).
In this context, ensuring that the broader population has adequate levels of digital literacy supports both amore productive workforce and a more inclusive society, as services and other interactions continue to moveonline. Increasing broader digital literacy may also serve to raise awareness of cyber security risks andlessen the impact of cyber attacks.
The jobs that require a good foundation of digital literacy are many and varied. According to the NSC’s
Australian Skills Classification, most occupations in the Australian labour market need either intermediate orhigh proficiency on the digital engagement core competency (which provides an indication of the digital
literacy requirements of different jobs).17 This extends beyond IT roles, with other occupations requiring
relatively high competency in digital engagement including engineering and science professionals, businessand marketing professionals, and office managers (figure 3.12).
However, there are concerns about digital literacy levels among Australian employers and employees. Froman employer perspective, recent research on the learning and development activities of Australianbusinesses found that 26% of surveyed businesses reported digital literacy as a key skills gap (increasing to
34% for the business services industry) (DeakinCo and Deloitte Access Economics 2022, p. 11). And asurvey of Australian workers found that with regards to digital literacy skills, 24% of those surveyed statedthat they ‘don’t have the skill level required [by their employer] or skill is out of date’ (RMIT Online andDeloitte Access Economics 2021, p. 15). Digital literacy was the second-largest skills gap reported byworkers, with data analysis being the biggest identified gap — inadequate or outdated data analysis skills
were reported by 30% of those surveyed (RMIT Online and Deloitte Access Economics 2021, pp. 14–15).

17 The Australian Skills Classification contains ‘10 core competencies common to every occupation in Australia [and]uses a 10-point scale to describe the complexity of each core competency for each occupation’ (NSC nd). The digital
engagement core competency captures non-specialist skills associated with using technology — including hardware andsoftware — in any occupation. Occupations are assessed as requiring digital engagement proficiency of basic (score of
1–3; for example, sending simple email communication), intermediate (score of 4–7; for example, using software on aportable device) or high (score of 8–10; for example, setting up a large computer system).
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Figure 3.12 – Digital competency is required for many occupations outside of IT jobs
Average score on digital engagement competency for 2-digit occupations requiring
intermediate proficiency or higher, March 2022a
ICT Professionals
Design, Engineering, Science and Transport Professionals
Engineering, ICT and Science Technicians
Business, Human Resource and Marketing Professionals
Office Managers and Program Administrators
Numerical Clerks
Specialist Managers
Other Clerical and Administrative Workers
Inquiry Clerks and Receptionists
Personal Assistants and Secretaries
Protective Service Workers
Hospitality, Retail and Service Managers
Chief Executives, General Managers and Legislators
Electrotechnology and Telecommunications Trades Workers
Health Professionals
Legal, Social and Welfare Professionals
Sales Representatives and Agents
Sales Assistants and Salespersons
General Clerical Workers
Arts and Media Professionals
Health and Welfare Support Workers
Education Professionals
Other Technicians and Trades Workers
Automotive and Engineering Trades Workers
Clerical and Office Support Workers
Hospitality Workers
Machine and Stationary Plant Operators
Sports and Personal Service Workers
Sales Support Workers
Carers and Aides
Skilled Animal, Agricultural and Horticultural Workers
Storepersons
Farmers and Farm Managers

0
2
4
6
8
10
Digital engagement score (≥4 indicates intermediate proficiency)
a. The NSC’s Australian Skills Classification contains a competency score on digital engagement for 799 selected 4- and6-digit occupations (as defined in ANZSCO). Scores corresponding to occupations within a given 2-digit grouping havebeen averaged for this figure. Only occupations requiring ‘intermediate’ or higher proficiency (that is, scoring four or moreon the 10-point scale) are depicted in this figure, which represents 33 of the 43 2-digit occupation groupings.
Source: NSC (2022).

Some segments of the Australian population have lower digital literacy levels than others. For example, theAustralian Digital Inclusion Index reported a significant gap in digital ability between older and younger
Australians in 2021 (figure 3.13). The Index is based on the Internet Skills Scale, which includes both basic
and advanced digital capabilities; advanced capabilities (such as operating IoT technologies and using thecloud) may go beyond the baseline skills required to undertake everyday digital tasks. However, even when
only considering basic operational skills (such as downloading files and setting passwords) and information
navigation (such as searching the internet and verifying information), there are substantial gaps between theyoungest and oldest age cohorts (ADII 2021). The Index also reports a digital ability gap between Australians

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Targeting government investments and policy priorities

living in metropolitan and regional Australia, and lower digital ability scores for cohorts with lower income andeducation levels (figure 3.13).
Figure 3.13 – Digital ability declines with age, income and education levels and is also
lower in regional Australia
Index of digital ability overall in 2021, by age, geography, income and educationa
90
80
70
60
50
40
30
20
10
0

Age

Geography

IncomeEducationa. Income quintiles are defined as follows: Q1 represents incomes less than $33 800, Q2 represents $33 800 to $51 999,
Q3 represents $52 000 to $90 999, Q4 represents $91 000 to $155 999, Q5 represents incomes of $156 000 or more.
Source: ADII (2022).

As increasing amounts of economic and social activity are taking place via online channels, low digital
literacy in some population cohorts can reduce their ability to consume essential services and undertake
everyday transactions. Just as a lack of regional digital infrastructure may lead to social exclusion(section 3.1), people with limited digital ability can face difficulties accessing services such as homeschooling, telehealth consultations and online banking. This could compound economic and social
disadvantage; for example, low digital literacy among low income earners or those who have had limited
education opportunities can be a significant barrier to accessing and maintaining employment (ACOSS 2016,p. 3). And limited ability to use digital health services in remote areas, which already have greater difficulties
accessing health care in person, can lead to more vulnerabilities and health risks in these areas (Beaunoyer,
Dupéré and Guitton 2020).
There are already government initiatives aimed at improving the digital literacy of various cohorts. For
example, the Australian Government’s Regional Tech Hub — delivered by the National Farmers' Federation
and Australian Communications Consumer Action Network — supports regional and remote Australians toconnect to new technologies, including by ‘troubleshoot[ing] common connectivity problems’ (DITRDC 2019).
The Victorian Government’s Regional Digital Fund provides grants that include projects for building digitalskills and capability in regional Victoria (RDV 2021). And to increase the digital literacy and online safety ofolder Australians, the Australian Government’s Be Connected program provides a range of resources andinteractive tools, including personalised mentoring in local community settings (DSS 2021).

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3.4

Balancing cyber security and growth

The growing number of cyber attacks in Australia and the increasing sophistication of these attacks havenegative economic consequences (section 2.2). The government’s role in mitigating and managing cyber risk
is important, but can involve restrictions or additional requirements on private entities, which may inhibit
economic growth. For example, unnecessarily burdensome regulation can divert businesses’ resourcesaway from other operations, which may negatively affect broader business activities or undermine existing
security protocols. The Australian Institute of Company Directors has stated that:
There is a risk that [an overly compliance-focused] approach will divert attention from senior
management and directors in actively responding to cybersecurity threats and building resilience andultimately add to the existing regulatory burden with negative productivity results. (AICD, sub. 44, p. 7)
As such, government activity in the cyber security policy area should be measured and carefully balance thecosts of any intervention against its benefits.
Governments should support both cyber resilience and response to cyber attacks. The World Economic
Forum defines cyber resilience as ‘not only defending against cyberattacks, but also preparing for swift andtimely incident response and recovery when an attack does occur…[and] the ability of an organization totranscend… any stresses, failures, hazards and threats to its cyber resources within the organization and its
ecosystem’ (WEF 2022, p. 15). Although this indicates that cyber resilience is broader than just the attack
response itself — as it includes elements of prevention beforehand and longer-term recovery after the fact —many stakeholders focus narrowly on responding to an attack. A recent global survey of cyber leaders foundthat 59% did not have a good understanding of the differences between cyber security response and cyber
resilience, believing that the two are synonymous (WEF 2022, p. 15).
There is already significant Australian Government activity addressing cyber security issues. Australia’s
Cyber Security Strategy was released in 2020 (Home Affairs 2020a), building on an earlier strategy from2016, and various pieces of legislation and initiatives have been implemented (box 3.5).

Box 3.5 – Australian Government activity on cyber security issues
The centrepiece of the Australian Government’s cyber security policy is Australia’s Cyber Security Strategy
2020, which highlighted a range of investments made by the government’s $1.67 billion of (then) budgeted
expenditure on cyber security over 10 years (Home Affairs 2020a). This included the Cyber Enhanced
Situational Awareness and Response package, which was announced in June 2020 and allocated funding tovarious initiatives such as expanded capabilities and workforce at the Australian Signals Directorate (ASD),
creating a new cyber threat-sharing platform for information sharing between industry and government, andmore research, mitigation and prevention activity (Defence 2020). The Australian government also released
the National Plan to Combat Cybercrime in March 2022 to increase collaboration between Commonwealth,state and territory partners in combating cyber crime (PMC 2022b, p. 17).
The Australian Cyber Security Centre (ACSC) is part of the ASD and was established in 2014. It
monitors cyber threats, provides information about good security practices, and investigates and assists
with responses to security incidents. The ACSC runs various programs to improve cyber security acrossboth large critical infrastructure organisations and smaller businesses and individuals. It also promotes

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Box 3.5 – Australian Government activity on cyber security issues
collaboration between industry, researchers and government agencies through workshops and events
run by its Joint Cyber Security Centres.
There has been a range of legislation enacted regarding the cyber security of Australia’s criticalinfrastructure. The Security of Critical Infrastructure Act 2018 (Cth), Security Legislation Amendment(Critical Infrastructure) Act 2021 (Cth) and Security Legislation Amendment (Critical Infrastructure
Protection) Act 2022 (Cth) apply to 11 sectors that are deemed to be critical infrastructure. Companies
covered by this legislation need to meet additional cyber security obligations such as mandatory incident
reporting to the ACSC, being subject to government intervention in response to a serious security incident if
certain conditions are met and (for some entities) needing a risk management program (CISC 2022b).
Other legislation applies more broadly outside of critical infrastructure. Breaches of personal data arecovered under the Privacy Act 1988 (Cth) and breaches involving financial institutions are covered by the
Prudential Standard CPS 234 on Information Security. There are also potential liabilities under the
Corporations Act 2001 (Cth) if ‘directors failed to set up proper standards of cyber security to be
implemented by management, for the protection of the company’s business’ (PwC 2017). For example, afinancial advice company was recently found to have contravened the Corporations Act because of ‘its
failure to have documentation and controls in respect of cybersecurity and cyber resilience in place thatwere adequate to manage risk’ (FCA 2022, p. i).
The Australian Government released a Ransomware Action Plan in October 2021, in part reflecting thesignificant growth in ransomware attacks reported to the ACSC (Home Affairs 2021b). It is intended tocomplement the broader initiatives and overarching approach outlined in the Cyber Security Strategy, with key
elements introduced in the Crimes Legislation Amendment (Ransomware Action Plan) Bill 2022 in February
2022 (Parliament of Australia 2022). These included new criminal offences relating to ransomware attacks
and stronger powers to investigate offshore cyber criminals and seize digital assets (Lim et al. 2022). The
mandatory ransomware incident reporting scheme that was proposed in the Plan is still under development
and was not included in this Bill. The Bill has since lapsed with the dissolution of Parliament in April 2022.

Providing information about good security practices and response
Government initiatives to improve cyber resilience and response should be ‘light touch’ where the risks are
relatively low. This minimises the potential for unnecessary costs to be imposed on businesses while still
supporting better security outcomes. Providing guidance to Australian businesses and individuals on how to build
cyber resilience and respond appropriately to cyber attacks is one form of comparatively minimal intervention.
There is already a range of information published by the government about improving cyber security
practices. The Australian Cyber Security Centre (ACSC) — which sits within the Australian Signals
Directorate (ASD) — has various resources to assist individuals, small and medium businesses, larger
organisations and critical infrastructure providers, and government agencies with mitigating, managing andanticipating cyber risks. These include:• step-by-step guides that are more targeted towards individuals and smaller businesses, which outline
basic and practical security instructions such as turning on automatic updates, using two-factor
authentication and securing communication channels (ACSC 2020)• material for larger and more mature organisations that require further guidance, including the ‘Essential
Eight’ set of baseline mitigation strategies for cyber protection (ACSC 2021c) and the Information Security77

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Manual, which advises organisations on selecting, implementing and assessing security controls in a waythat is most relevant to their circumstances and risks (ACSC 2022b).
While widely available general guidance is useful, a previous study on small businesses’ cyber security
practices reported that there is:… a desire for targeted recommendations that speak to their specific circumstances. A key
complaint about [the ACSC’s website] is that the information is too general, which makes it hardfor study participants to apply to their own circumstances. … Small businesses don’t expect
personalised support from free sources like [the ACSC’s website], but the generic approach is notworking. (Cynch Security et al. 2021, p. 31)
Improving the relevance and accessibility of general cyber security advice would require providing guidance
based on businesses’ specific operations and risk factors. Internationally, the Scottish Government has
proposed the ‘development of a freely accessible online tool to support SMEs, in particular, to undertake acyber threat assessment… and be directed to appropriate guidance or standards’ (Scottish
Government 2018, p. 44). The Australian Government has a Cyber Security Assessment Tool, in which abusiness can complete an online survey about their industry, size, use of technology and current security
practices (such as updating software, secure passwords, multi-factor authentication, information backups
and incident planning) (DISER 2021). Based on their answers, businesses are assigned a cyber security
maturity level using a four-point scale — from ‘starter’ to ‘champion’ — and provided with tailoredsuggestions, including actionable improvements and relevant links to the ACSC’s step-by-step guidance.
However, SMEs continue to have relatively lower uptake of cyber security software, as discussed in
section 2.2. More use of the interactive Cyber Security Assessment Tool by SMEs would support the
adoption of more effective security practices and increase the value derived from information alreadypublished by the government. One channel for increasing awareness about this tool could be throughindustry associations — information could be shared between members, particularly to smaller businesses,
about cyber security risks and tools for managing these risks.
Cyber security guidance can also help businesses and individuals to respond to incidents quickly andeffectively after a breach occurs. Low and no-cost services are likely to have the highest uptake; forexample, IDCARE is a not-for-profit organisation that provides free information and education to those whohave been affected by cyber fraud. It is funded by subscribers such as major banks, government agencies
and airlines, which themselves receive tailored incident response support (IDCARE 2022). The government
has also published advice on cyber response, including in the ACCC’s Scamwatch (ACCC 2022i) and the
ACSC’s ransomware response guide (ACSC 2021d). These initiatives collect and disseminate informationfrom entities that have experienced cyber fraud, assisting other consumers and businesses to recover
should they experience similar scams and ransomware incidents (ACCC 2021e, p. 72).

Regulation is required for high-risk situations
It is reasonable that situations posing greater cyber security risks to the broader Australian economy andsociety require stronger government activity than just providing guidance. Higher-risk cases include situations
where a cyber attack on one entity could have widespread negative effects, such as where the entity has many
interdependencies with and connections to other businesses and individuals (as discussed in section 2.2). It
could also include instances where a cyber attack would reduce the availability of a service or asset that isessential to the functioning of the economy or society, such as water, energy or medical services.
More substantial government intervention could involve imposing regulation on companies for which an
attack would represent a significant broader risk. Cyber security regulations must be designed and78

Targeting government investments and policy priorities

implemented in a way that minimises unnecessary burdens, is not excessively intrusive and establishes clear
expectations of the regulated entities. As summarised in box 3.5, the Australian Government has alreadypassed several pieces of legislation regarding the cyber security of critical infrastructure sectors and assets,
which have been identified as potentially facing higher risks. There are mixed views about the evolution ofAustralia’s critical infrastructure legislation to date, regarding both the government’s approach to developing
and implementing the regulations, and its content.
On the approach, given the potential for these regulations to have large and complex impacts on businesses’core operations, industry consultation is important to enable government to understand the implications of itschanges and address concerns about its approach, if possible. There has been some stakeholder
engagement in developing the Australian legislation since the Department of Home Affairs first released its
consultation paper in August 2020 (Home Affairs 2020b). However, industry stakeholders have observedthat the Security Legislation Amendment (Critical Infrastructure) Act 2021 (Cth) — which included
broadening the definition of critical infrastructure, increased reporting obligations and new government
intervention powers — was rushed following the recommendation of the Parliamentary Joint Committee onIntelligence and Security, which did not allow for suitable consultation (Karen 2021; Kwan 2021).
The Commission has heard from stakeholders that, while many affected companies appreciate the intent ofcritical infrastructure security legislation, inadequate consultation early in the process created significant
uncertainty and apprehension. Companies observed that ‘the “early days” of consultation had moved “a little toofast” and … it was more important to get things right than out the door’ (Barbaschow 2021b). The Commission
also heard that industry engagement has improved over time; for example, by incorporating small-groupconsultations rather than relying on large town-hall meetings, and clarifying and finessing definitions and rules.
There are several instances where the Department of Home Affairs has revised the details of their approach
following industry feedback, such as in relation to the risk management programs required by the Security
Legislation Amendment (Critical Infrastructure Protection) Act 2022 (Cth) (Home Affairs 2022a).
Regarding the content of the legislation, specifying baseline cyber security obligations and reporting
requirements for these higher-risk sectors is necessary government activity to protect national interests,
given the negative externalities and information asymmetries involved (section 2.2). There may be
opportunities to improve how these requirements are implemented; for example, more streamlined reporting
to reduce overlapping obligations is discussed below. Broadly speaking, the Australian Government’s actions
are consistent with the increasing global regulatory activity in this space, as various other countries havealso introduced cyber security regulations for critical infrastructure. These include the US’s Cyber Incident
Reporting for Critical Infrastructure Act (2022) and the EU’s Directive on Security of Network and Information
Systems (2016) (which has since been expanded to cover more critical sectors and entities).
The strongest element of Australia’s critical infrastructure regulations is the government’s new powers tointervene and assist a critical infrastructure provider in responding to a serious security incident. Industry
feedback on this aspect of the legislation has been mixed: while some companies are open to receiving
government assistance, as long as it is proportionate and done jointly with the company, others (especially inthe technology sector) believe the harms of such government intervention outweigh the benefits(Barbaschow 2021a). In practice, the government may rarely have to use these powers if companies havesuitable risk mitigation and management processes that minimise the likelihood of serious incidents
occurring — and the rest of the critical infrastructure security obligations seek to ensure this is the case.
However, the mere existence of intervention powers in the legislation could have the unintended
consequence of deterring investment, particularly by multinational companies if Australia is ahead of othercountries in implementing such requirements.

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As it is early days, more time is required to assess whether the current suite of critical infrastructure
regulations strike an appropriate balance between securing high-risk sectors while not unduly discouraging
future growth. The government should monitor and evaluate the effectiveness and economic impact of
implemented policies to improve its understanding of the trade off between security and growth, andrecalibrate the regulations as required. Cyber security company Palo Alto Networks has observed that ‘there
is no independent review process articulated in the bill… this is contrary to some of the approaches taken in
like-minded jurisdictions’ (Williams 2022). An evaluation mechanism could also improve government’s ability
to incorporate industry feedback into its regulations.

Finding 4.16
Security regulations need to balance risk management and innovation impacts
Cyber security regulation of high-risk sectors needs to manage the risks without unnecessarily deterringbusinesses’ innovation and investment. The impacts of the government’s recent critical infrastructure security
regulations remain unclear but, while more time and information is required to understand whether theseregulations strike an appropriate balance, there is no evaluation or review process included in the legislation.

Streamlining incident reporting requirements to avoid duplication
There is currently no universal requirement for Australian businesses to report cyber security incidents.
However, there are several mandatory reporting obligations for specific types of businesses that haveexperienced particular kinds of incidents (including under some of the Australian Government’s cybersecurity initiatives summarised in box 3.5). These requirements relate primarily to operators of criticalinfrastructure, organisations that have experienced breaches of private personal data, financial organisations
and proposals for large businesses that experience ransomware attacks.
• Under the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act), and subsequent amendments,
critical infrastructure asset owners and operators must report critical incidents (with a ‘significant impact’
on their asset) within 12 hours of becoming aware of the incident, and other security incidents (with a‘relevant impact’ on their asset) within 72 hours. Reports must be made to the ACSC (CISC 2022a).
• The Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth) amended the Privacy Act 1988 (Cth)to require organisations to ‘notify affected individuals and the [Office of the Australian Information
Commissioner] when a data breach is likely to result in serious harm to an individual whose personal
information is involved’ (OAIC nd). The scheme applies to all organisations covered by the Privacy Act,
which includes Australian Government agencies and businesses with annual turnover of more than $3
million. The Privacy Act is currently being reviewed, and some submissions to the review have observedthat ‘small businesses [with turnover of less than $3 million] pose a significant cyber security risk…
requiring small businesses to comply with the Act (in particular… the Notifiable Data Breaches Scheme)
could be a mechanism to mitigate this risk’ (AGD 2021, p. 42).
• In the financial services sector, the Prudential Standard CPS 234 on Information Security requires entities
regulated by the Australian Prudential Regulation Authority (APRA) — including banks, insurers andsuperannuation funds — to notify the regulator of material information security incidents within 72 hours.
Entities must also notify APRA of material information security control weaknesses within 10 businessdays (APRA 2019, p. 8).
• The current proposal for mandatory reporting in the Ransomware Action Plan requires businesses withannual turnover of more than $10 million to report ransomware attacks. Similar to the SOCI Act,

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ransomware incidents with a ‘significant impact’ on a business would need to be made to the ACSC within
12 hours and incidents with a ‘relevant impact’ within 72 hours, with a follow-up report subsequently
required to provide ‘material details’ about the incident (Lim et al. 2022).
Various other countries have similarly disparate requirements for cyber incident reporting. For example, in
the United States, all 50 states have laws that require companies to notify residents if their sensitive personal
data has been breached, but these requirements vary across states (such as needing to notify different
parties or specifying different notice content and timing) (DLA Piper 2022). There are also federal laws, suchas the recently passed the Cyber Incident Reporting for Critical Infrastructure Act (2022), which creates
obligations to report cyber attacks on critical infrastructure. The numerous requirements can complicatecompliance for businesses, particularly those operating in multiple states.
The proliferation of reporting requirements and the need to report to different agencies could place
unnecessary burdens on businesses at an already challenging time, when they are focusing on recoveringfrom the security breach. A more unified approach to reporting requirements would assist — the AustralianInstitute of Company Directors (sub. 44, p. 8) notes that ‘the example of cyber incident reporting… reflects atendency for governments and individual regulators to “go it alone” to respond to an emerging risk. …
Without coordination across government, organisations and boards risk being swamped by complex,
inconsistent and duplicative obligations’. The Australian Information Industry Association has also observedthat disparate but overlapping cyber security reporting regimes place unnecessary red tape burdens on
regulated companies (Smith 2022). The Insurance Council of Australia noted that overlapping cyber incident
reporting requirements from the ACSC and APRA are ‘compounding resource pressures for insurers, in ahistorically tight market’ (ICA, sub. 203, p. 5).
Increasing coordination between government agencies can help to improve this situation, though
coordination can also have its own costs, and these would need to be outweighed by the benefits of a more
unified approach to incident reporting. For example, the UK Government has identified this as an area for
improvement: one of the central pillars of its Government Cyber Security Strategy: 2022 to 2030 is ‘defend
as one’ (Cabinet Office 2022). This includes the creation of the Government Cyber Coordination Centre(GCCC), which aims to streamline the government’s approach to cyber security, including incident reporting:[The UK] government will establish a cyber coordination centre to better coordinate operational
cyber security efforts across government organisations and truly enhance government’s ability to‘defend as one’… the GCCC will foster partnerships to rapidly identify, investigate and coordinate
the response to incidents alongside threat and vulnerability reporting. (Cabinet Office 2022)
In addition, early and ongoing consultation with industry when designing and implementing various reporting
obligations can help government to identify overlaps between separate requirements and, where possible,
streamline these to avoid duplication. Coordination between policymakers and regulators, and theimportance of industry engagement, are discussed more generally in section 3.6.
One option to simplify cyber security incident reporting would be to have a single interface or portal for Australianbusinesses to lodge all cyber incident-related reports required under various regulations. The operating system
underlying the interface would then direct reports to the ACSC or relevant government agency as required to
inform the response, without the business needing to make multiple reports or spend time identifying to whom andhow they need to report. In the future, the government could work with software providers to build cyber incident
reporting into commonly used cyber security software, so that reports are automatically sent to the relevant
regulator if an incident occurs. This would be a similar approach to that taken by the ATO in working with software
providers to build STP reporting into businesses’ accounting software (section 3.2), although the coverage andfunctionality required in the cyber security reporting context is somewhat different.

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Finding 4.17
Businesses experiencing security incidents can face multiple reporting obligations
A business may face multiple reporting requirements for a single cyber security incident, depending on its
operations and the nature of the breach. This can place unnecessary burdens on businesses that arefocused on recovering from the cyber incident. More coordination between government agencies andstreamlining of reporting requirements (such as via a single online interface) would assist in reducing
reporting burdens on businesses.

Recommendation 4.5
A single interface for cyber incident reporting
The cost for businesses of complying with cyber security regulations should be reduced by streamlining
incident reporting requirements, with all reporting to occur via a single online interface. The operating
system underlying this interface would then direct reports to the Australian Cyber Security Centre or otherrelevant government agency as required. This could provide the platform for the government to work withcyber security software providers to build incident reporting functions into commonly used software, sothat reports are automatically sent to relevant agencies if an incident occurs.

Embedding cyber resilience and response into government
As users of digital and data tools themselves, governments also have their own responsibilities to build cyber
resilience and adopt good security practices. There are a range of initiatives and guidance available tosupport government agencies in maintaining their cyber security obligations. These include:• the Protective Security Policy Framework, which features policies on governance and information,
personnel and physical security, and requires agencies to annually report their security maturity (AGD nd)• the security criteria in the Digital Transformation Agency’s Digital Service Standard for government
services (DTA nd)• the ACSC’s Information Security Manual (discussed above)• the whole-of-government Hardening Government IT initiative, which is being led by the Digital
Transformation Agency and includes developing cyber hubs to centralise government agencies’
capabilities in cyber threat monitoring, detection and response (DTA 2021).
In addition, the ASD provides direct assistance on cyber security to agencies. In 2020-21, this included
conducting 14 cyber uplift activities with Commonwealth entities and publishing quarterly Cyber Hygiene
Improvement Programs reports to government agencies (including undertaking 34 high priority operational
tasking activities) (ASD 2021).
But in a world where increasing volumes of government transactions and services are digitised, more can bedone to ensure that government’s use of technology and the citizen data it holds are secure. This includes
ensuring that all government employees, including those working outside IT functions, are sufficiently trainedin basic security protocols to minimise the potential for human errors that could lead to cyber breaches. For
example, between January and June 2021, the Office of the Australian Information Commissioner (OAIC)
reported that 74% of the Australian Government’s data breach notifications were due to human error — asignificantly higher rate than the 30% observed across all sectors. The OAIC stated that ‘human error82

Targeting government investments and policy priorities

remains a major source of data breaches [and] the human factor also plays a role in many cyber security
incidents… Organisations can reduce the risk of human error by educating staff about secure information
handling practices and putting technological controls in place’ (OAIC 2021).
Government agencies are also large consumers of technology: Gartner forecasts that in 2022, Australian
governments — at the federal, state and territory and local levels — will spend almost $4.7 billion on
software (up 19% on 2021 spend) and more than $6.4 billion on IT services (up 7%) (Govtech Review 2021).
As purchasers of digital and data-related products, governments can encourage a greater focus on cyber
resilience by incorporating security considerations into their procurement decisions. The Australian Strategic
Policy Institute has made several suggestions on how this could be enacted:
One suggested option has been to explicitly include security as a ‘fourth pillar’ in evaluating
proposals, alongside cost, quality and timescales, although this then leaves subjectivity about how
to measure security and weight it against the other criteria. A better approach would be aneffective pricing mechanism, reflecting the fact that better security should equate to lower financial
risk. (Shah 2020, p. 10)
This would incentivise potential suppliers to invest in good cyber security practices, without mandating
requirements across all businesses. A similar measure is found in the US Government’s Executive Order on
Improving the Nation’s Cybersecurity (The White House 2021). This stipulates that government agencies
procuring in-scope software must ‘receive attestation from the software producer that the software’s
development complies with government-specified secure software development practices’ (NIST 2022, p. 3).
These practices can include assurances that software producers maintain secure development environments(such as enacting multi-factor authentication, data encryption and relationship audits), maintain trusted
source code supply chains or are regularly checking for vulnerabilities.
The ACSC provides guidance on how Australian organisations, including government agencies, can manage
cyber supply chain risks (ACSC 2021b). Incorporating criteria about a software provider’s security capabilities andcyber risk management practices explicitly into government procurement decisions would take this one stepfurther, and incentivise organisations seeking to supply goods and services to improve their cyber resilience.

3.5

Supporting ethical use of technology and data

Emerging technologies such as AI, IoT and virtual and augmented reality have created ethical issues that may
not relate directly to productivity, but can degrade trust in businesses’ and governments’ use of technology anddata, which in turn limits adoption. In Australia, trust is the central driver for widespread acceptance of AI inparticular: ‘if people perceive AI systems to be trustworthy … this leads to the acceptance necessary to realise
the potentially vast societal benefits that AI can produce’ (Gillespie, Lockey and Curtis 2020, p. 48). This study
also found that perceptions of the adequacy of AI regulations influence trust levels, and about two-thirds ofsurveyed Australians think that the government should regulate AI (with co-regulation between industry andgovernment also widely supported) (Gillespie, Lockey and Curtis 2020, p. 24).
Ethical concerns about the use of technology and data have arisen around the world. Several well-publicised
examples include:• potential breaches of privacy associated with collecting and storing personal data, or using this data to
influence human decisions, such as the Facebook–Cambridge Analytica case (Müller 2020)• the ability of children to give informed consent for the collection and use of their data, particularly whenservice providers have complex privacy policies and use ‘dark patterns’ to nudge young people into
accepting terms and conditions that they do not understand (Reset Australia 2021)

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5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report• unintended bias in automated decision making systems, such as an American criminal justice algorithm
mislabelling African-American defendants as high risk at twice the rate of white defendants (Manyika,
Silberg and Presten 2019)• how to assign responsibility when using automated decision making systems, such as accidents involving
autonomous vehicles that have been programmed to react to an oncoming crash by prioritising a driver
over a pedestrian (Abu-Khalaf and Haskell-Dowland 2021; Awad et al. 2018).
A proactive approach to managing ethical issues is required to maintain trust while also avoiding hampering
technological progress and innovation. There are a number of existing frameworks about the ethical use oftechnology and data, incorporating principles such as transparency, accuracy and privacy (box 3.6). The
Consumer Policy Research Centre has stated that the government should take a holistic approach to data
and digital policy ‘guided by clearly articulated principles. Without it, the Government is at great risk ofdeveloping a policy environment which is not joined up or coherent… which will reduce productivity as wellas undermine investment and community trust’ (CPRC, sub. 19, p. 3).
Despite the prevalence of these frameworks, the challenge for businesses and governments is turning
principles into action. Global examples of how businesses have implemented ethically responsible AI include
having an ethics review board of subject matter and ethics experts, which provides advice or approval for
ethics strategies and specific use cases (Eitel-Porter 2021), and adopting an ‘ethics by design’ policy todeveloping AI systems (EC 2021b).

Box 3.6 – Frameworks and principles guiding ethical use of technology and data
There are numerous frameworks in Australia and internationally that promote the ethical use oftechnology and data, mainly about the use of artificial intelligence (AI). These have been developed bygovernments and expert organisations; for example:• the CSIRO’s Data61 AI Ethics Framework discussion paper (Dawson et al. 2019) and the ensuing
Department of Industry’s Australia’s Artificial Intelligence Framework (DISR 2019)• the Australian Computer Society’s AI Ethics Framework (ACS 2021c)• the University of California’s Responsible Artificial Intelligence report (UC 2021)• the EU’s proposed Artificial Intelligence Act (EIPA 2021)• the US’s Algorithmic Accountability Act (2019)• the Office of the Privacy Commissioner of Canada’s Regulatory Framework for AI (OPCC 2020)• the UK’s Data Ethics Framework (CDDO 2020)• the New Zealand Privacy Commissioner and Government Chief Data Steward’s principles for safe andeffective use of data and analytics (OPCNZ and CDS 2018).
Many of these frameworks cover similar principles, suggesting that there is a strong consensus on how
to manage and mitigate ethical risks in using AI and data analytics. Common elements include:• transparency — informing individuals when AI-enabled tools are used and, to the extent possible,
enabling them to understand the methods, potential outcomes, ways to challenge outcomes andremedies to address any harms caused• accuracy, reliability and safety — developing AI-enabled tools that are effective, accurate and reliably
operate in accordance with their intended purpose

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Box 3.6 – Frameworks and principles guiding ethical use of technology and data
• fairness — assessing for bias and the risk that automated decisions unfairly discriminate against
individuals, communities or groups. Procedures should be put in place to proactively identify, mitigate
and remedy these harms• privacy and security — designing AI-enabled tools to maximise the privacy and security of personal data
• human-centred values — developing and using AI-enabled tools in ways that respect human rights• shared and net benefits — creating net benefits that are shared as broadly as possible, including
across individuals, society and the environment• accountability — holding developers and users of AI accountable for outcomes, including unintended
consequences• contestability and auditability — having an efficient and auditable process to allow people to challenge
the use or output of an AI algorithm.

Most Australian companies are in the early stages of adopting ethically responsible technology practices,with the Responsible AI Index 2021 finding that over 90% of surveyed companies were still planning,
initiating or developing their AI ethics maturity (Fifth Quadrant, Ethical AI Advisory and GradientInstitute 2021, p. 10). There were industry-level differences in maturity levels, with manufacturing andfinance leading the way (figure 3.14). The Committee for Economic Development of Australia reports a‘disconnect’ in how organisations prioritise responsible use of and consumer trust in AI: 88% of participantsin responsible AI workshops state that trust and consumer confidence in AI is a high priority for the future,but only 12% identify it as a current priority (CEDA 2022, p. 20).
On the government side, operationalising ethical principles is important for agencies to maintain their social
licence to deliver digital and data-enabled government services, and for supporting confidence in public
institutions more broadly. This is particularly crucial where technology is used to deliver sensitive or
citizen-facing services. For instance, the ‘Robodebt’ automated debt assessment and recovery program — inwhich the government wrongly recovered payments from hundreds of thousands of Australians — illustrates
how the inappropriate use of algorithmic decision making can more broadly damage trust in government(Rinta-Kahila et al. 2021; Tonkin 2021). The NSW Productivity Commission has pointed out that government
policy should be cognisant of these issues as ‘public aversion to technology can prevent its uptake ... andthat could in turn stifle private innovation and productivity’ (NSW PC 2022, p. 48).

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Figure 3.14 – Most Australian companies are still developing their AI ethics maturitya
Distribution of responsible AI index maturity scores for all businesses and averagescores by industry, 2021

Maturing(80-100 score)

Manufacturing
Finance and banking
Technology andcommunications
Healthcare andsocial assistance

Developing(65-79 score)

Services
Initiating(50-64 score)

Public services

Energy and resources
Retail and hospitality

Planning(0-49 score)

Construction
0

10

20
%

30

40

0

20
40
60
Maturity score80

a. The responsible AI index was created using data from a survey of 416 decision makers with influence over AI strategy
at businesses with at least 20 employees.
Source: Fifth Quadrant et al. (2021, p. 11).

Government should adopt a risk-based approach
There are various policy options that can support the ethically responsible use of technology and data,
ranging from information provision to regulation. Direct intervention and its potential benefits in improving
confidence in emerging technology and data uses must be balanced against the potential costs incurred bybusinesses in complying with government requirements. A risk-based approach is appropriate to guide
governments on where stronger activity is necessary, and provide clarity for businesses on where to focus
their efforts on improving their ethics maturity.
Clearly defining different risk levels and identifying high-risk areas are key to designing government policy ontechnology and data ethics. Risk categories should be broad enough to cover the ethical use of different
digital and data tools, by incorporating considerations around technology types, uses and the kinds of harms
to be avoided. For example, unsupervised learning algorithms could fall into a higher risk category because‘there’s a lack of transparency into how data is clustered’ (Delua 2021), but if such an algorithm was used for
relatively innocuous purposes, such as a chess game, it could fall into a lower risk category. Some guidance
can be taken from risk-based approaches to ethical issues emerging overseas, such as the EU’s regulatory
framework on AI (figure 3.15) and the US’s Algorithmic Accountability Act (2019), which defines a high-risk
system as one that contributes to bias or makes decisions about ‘sensitive aspects of consumers' lives’(United States’ Congress 2019).
The extent to which high-risk areas need to be monitored by government and potentially require regulation isan open question for policymakers. Around the world, the European Union is currently the most active in
exploring regulation for ethically responsible uses of technology and data, specifically for AI. The proposed86

Targeting government investments and policy priorities

Artificial Intelligence Act prohibits AI that poses unacceptable risk (per figure 3.15) and introduces
regulations for high-risk uses, such as the need to comply with data governance standards, have risk
management systems in place and provide users with transparent information about their AI (EC 2021c,
sec. 5,9,10,13). Even when taking a risk-based approach, it is challenging for governments to determine
which regulations to apply in high-risk situations as they must balance the requisite protections with growthobjectives; for example, the former Chief Executive Officer of Google has argued that the EU’s AI
transparency requirements are unviable and could stifle innovation (Haeck 2021).
It is vital that government consults widely with industry and technical experts when designing andimplementing policy responses to high-risk ethical issues. This is partly because the technical details of
emerging uses of technology and data can be challenging for policymakers to grasp, and stakeholder
engagement promotes mutual understanding and reduces the possibility of introducing ineffective policies or
unnecessarily restrictive regulations.
Figure 3.15 – The EU defines four levels of risk characterising AI systems
European Commission’s regulatory framework proposal on AI

Unacceptable Risk

AI systems where use poses a clear threat tothe safety, livelihoods and rights of people,
such as social scoring by governments

High Risk

AI systems where use could create harm tolife, livelihood or puts fundamental rights at
risk, such as automated administration ofjustice or remote biometric identification

Limited Risk

AI systems where potential harm can bevoluntarily avoided, with specific transparency
obligations so that users know it is an AI
system and can choose not to interact,such as an AI chat bot

Minimal Risk

AI systems posing minimal risk to humans
and use is unlikely to cause harm; this ismost AI systems, such as AI-enabled
video games or spam filters

Source: EC (2022).

For example, in the case of AI regulation, the Australian Strategic Policy Institute observes that:…the current limitations in [understanding the ‘black box’ nature of decisions made by AI fromlarge bodies of data] are the key problem in figuring out how to safely and ethically use andregulate AI… If we can’t be certain of what correlations an AI is independently developing to
inform data screening and decision-making, we can’t be certain that either comply with safe andethical principles. (Westendorf 2022, p. 5)
Ongoing consultation would also assist in identifying emerging areas that may be higher risk and require stronger
intervention, as existing activities by both businesses and governments have predominantly focused on AI ethics.
In the future, ethically responsible digital and data use will need to capture other types of technology andanticipate emerging issues. For example, there are likely to be ethical considerations arising from the collection ofincreasingly sensitive data and questions about how this data can be used — such as the growing ability to gather
information about an individual’s genetics, health and behaviours and whether it is appropriate for insurance87

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reportproviders to access and use this data. Stakeholder engagement would help governments to improve theirunderstanding of the potential harms of emerging uses of technology and data, determine whether these uses are
genuinely high risk and consider the implications of any proposed policy responses.
The Australian Government has undertaken stakeholder consultations about automated decision making and
AI regulation, covering issues such as public trust, transparency in outcomes and the potential for bias or
discrimination (PMC 2022c, pp. 10–12). The Department of Industry, Science, Energy and Resources has
also conducted an AI ethics principles pilot program with Australian businesses (including theCommonwealth Bank, Telstra, Insurance Australia Group and Flamingo AI) to better understand how ethicalprinciples have been implemented in AI-related processes and products (DISER nd). This industry
engagement has improved the government’s understanding of new uses of technology and data and theethical risks that can arise, while also creating valuable feedback loops between government and businesses
about practical issues in applying ethical principles.
In addition to these initiatives that are specific to the ethical use of AI, the breadth of the common principles
that guide technology and data-related ethics (box 3.6) means that various economy-wide policy frameworks
may also apply to the use of AI and other digital tools. These include the cyber security regulations
discussed in section 3.4, and privacy regulations for collecting and using data (box 3.7).

Box 3.7 – Privacy regulation needs to balance legal and economic concerns
Digital privacy regulation plays an important role in protecting individuals’ rights, and unaddressedprivacy issues ‘can impact the community’s trust and undermine the success of new technological anddata initiatives by business and government’ (OAIC, sub. 173, p. 3). Industry stakeholders acknowledge
that the sheer scale of data held by businesses in the 21st century necessitates a comprehensive
legislative approach to privacy protections and obligations (AIIA, sub. 180, p. 4). Clear privacy regulationis also important to guide technological innovation, such as the use of facial recognition software byretailers Bunnings, Kmart and The Good Guys, which was introduced without due consideration of therisks the technology could pose (CPRC, sub. 115, pp. 3–4).
Although there is a clear need for privacy safeguards, there are also trade-offs between more regulation andproductivity and efficiency and, as such, the government should not focus solely on legal considerations insetting privacy regulation. For example, after the General Data Protection Regulation was introduced in the
EU — placing strict privacy requirements on data sharing — rising compliance costs saw firm profits decreaseby 8% and sales decrease by 2% (Presidente and Frey 2022). This primarily affected smaller businesses andthere was ‘no evidence that large technology companies, such as Facebook and Google, experienced any
reductions in either sales or profits’ (Presidente and Frey 2022). These effects of regulation on economic
activity — especially potential distributional effects on smaller firms — need to be considered when creating
digital privacy regulations. An overly legalistic focus on the need for privacy safeguards that is not coupledwith a consideration of their costs in limiting data use, competition and technological innovation risks
regulation swinging too far in the direction of restriction.
The costs of overly restrictive privacy regulations are not just felt by businesses, but also by individuals.
Consumers value their privacy; however, they also place a high value on the products and services thatare made available by data sharing. This contributes to a gap between people’s stated expectations foronline privacy and their online behaviour, or the ‘privacy paradox’ (Bongiovanni, Renaud andAleisa 2020). For example, in 2017, 69% of Australians stated they were more concerned about online

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Box 3.7 – Privacy regulation needs to balance legal and economic concerns
privacy than they were five years previously (OAIC 2017), but in the same year the Commission
observed that ‘more than 70 per cent of us hand over our personal data on social media. More than 80
cent of us are in a supermarket or airline loyalty program’ (CEDA 2017). Individuals willingly hand overprivate data through Internet of Things devices (Aleisa, Renaud and Bongiovanni 2020), social
networking and other technologies (Barth and De Jong 2017). Balancing consumer protection against
consumer preferences is also important when designing privacy regulation.
The government should therefore ensure that when implementing privacy regulation — or when consideringchanges, such as in the current Privacy Act review — it consults widely with affected stakeholders to balancethese legal and economic considerations, and targets interventions towards high-risk areas.

Finding 4.18
Translating principles of ethical use of technology into action is challenging
Governments have generally agreed on the principles of ethical use of artificial intelligence, but are still working
out how to translate this into action and where policy intervention is required. Given the trade-offs between
regulation (including existing economy-wide regulations, such as around privacy) and potential productivity
gains, any intervention would need to be appropriately targeted towards high-risk areas, and implemented inconsultation with industry and technical experts.

3.6

Coordinating the policy and regulatory environment

The diversity, complexity and pace of change of technology use can make it challenging for governments todesign and implement appropriate policy and regulatory frameworks. In addition, while the ever-increasing
amounts of data produced in the Australian economy and society provides new opportunities to create value,
it also gives rise to new considerations. Some of the issues that governments must grapple with in setting
digital and data policy and regulation include:• ensuring that policy frameworks are fit for purpose — policy settings must be appropriately calibrated
throughout the policy life cycle. Given the potential for rapid technological change, they need to respondquickly to issues arising from new digital and data uses so that they remain fit for purpose, such as bytaking an adaptive approach to regulation (Eggers, Turley and Kishnani 2018). This also helps to avoid
regulatory overreach, as settings can be adjusted if they are unnecessarily restrictive• enforcing regulation when boundaries are blurred — many uses of technology and data challenge
traditional market definitions, including by blurring the definition between consumers and producers, ordigital and data service transactions taking place across national boundaries. This can make it difficult toattribute responsibility and enforce laws (OECD 2020, chap. 1)• accommodating interactions and broader business model changes — the benefits and risks associatedwith a specific technology can be magnified when it is used in conjunction with other technologies, orwhen applied to large volumes of data. They can also derive from changes to broader decision making
processes or even entire business models (see, for example, CompTIA 2020), and these must be
accounted for in designing policy and regulation89

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report• avoiding technological protectionist policies — businesses that stand to lose from new uses of digital anddata could seek government assistance and protection through regulation, subsidies or policies that increase
the costs of technologically advanced rivals (Lambert 2021). Governments should be wary of vested
interests, as these types of intervention would likely slow technology adoption and stymie new innovations.
Given these considerations, focusing policy settings too narrowly on an individual technology or a single
aspect of data use is likely to be ineffective. Such an approach risks creating disparate regulations that target
specific problems, and this kind of piecemeal regulatory environment could lead to additional uncertainty or
costs for businesses, deterring adoption of productivity-enhancing uses of technology and data. For
example, various cyber security regulations that seek to address different security risks and sectors have led
to multiple incident reporting requirements for some businesses, as discussed in section 3.4. The TechCouncil of Australia submitted that government should take ‘a holistic approach to regulation… [and] provide
regulators with clear expectations and accountability for considering the need to minimise uncertainty andcompliance costs’ (TCA, sub. 51, pp. 18–19).
Australia has also, at times, taken a reactionary approach to addressing specific digital, data and cybersecurity issues. This may have unintended consequences, whereby legislation intended to address a narrowissue or sector eventually has a broader impact, due to the interlinked nature of digital and data activities.
For instance, the Criminal Code Amendment (Sharing of Abhorrent Violent Material) Act 2019 (Cth),criminalising violent online content in response to the 2019 Christchurch terrorist attacks, andTelecommunications and Other Legislation Amendment (Assistance and Access) Act 2018 (Cth), allowing
government to access encrypted communications, were both ‘drafted very broadly and much of the criticism
has focussed on the unintended consequences that arise from that approach’ (Chatwood and Allen 2019).
But the urgency with which these laws were designed and passed, in order to respond to particularconcerns, meant that consultation about their potential broader implications was limited.
Many of the policy areas where there has been piecemeal or reactive activity are issues that are worthy ofgovernment attention. However, government responses would be more effective at supporting emerging
digital and data uses if they were better coordinated, with industry previously observing that a regulatory
framework that is ‘largely piecemeal and lacks coordination, potentially creat[es] suboptimal implementationsof many [regulatory] initiatives’ (Data Republic 2020, p. 15). In interviews with government, regulators,
industry and civil society about effective approaches to technology regulation, the Tech Policy Design Centre
found that a common theme was ‘calls for consistent political leadership and improved coordination between
and among regulators and policy agencies’ (Weaver and O’Connor 2022, p. 8).
More coordination between different government agencies with oversight over digital, data and cyber security
issues would likely improve decision making and reduce uncertainty for regulated entities. Such coordination also
provides a forum for agencies to discuss good practices and successful approaches to designing andimplementing policy and regulation, including how they have navigated the complexities described above. For
example, agencies could share information about emerging risks or unintended consequences of particularregulations. They could also work together to identify areas of duplication or inconsistencies in their respective
activities — coordination on these matters is particularly important in areas where government sets minimum
standards or supports technology or data interoperability between different parts of the economy.
Recognising the benefits of increased coordination, the UK Government formed the Digital Regulation
Cooperation Forum (DRCF) in 2020. It now comprises the Competition and Markets Authority (which
regulates competition in digital markets), Information Commissioner’s Office (personal data protection),
Office of Communications (online safety and communications security) and Financial Conduct Authority(online financial scams). The DRCF enables joint responses to technological developments that cut acrossmultiple areas, more coherent regulatory approaches for interrelated issues (for example, overlaps between

90

Targeting government investments and policy priorities

data protection and competition regulation) and collectively developing technical expertise and analyticalcapabilities (CMA 2021). In 2021 to 2022, it created cross-regulatory teams across participating agencies
covering four digital and data topics: algorithmic processing, regulatory design frameworks, digitaladvertising technologies and end-to-end encryption (DRCF 2022).
More recently in Australia, the Digital Platform Regulators Forum (DP-REG) was established in March 2022
to improve coordination on digital platform regulation between the ACCC, ACMA, OAIC and Office of theeSafety Commissioner. DP-REG will meet every two months to ‘share information about, and collaborate on,cross-cutting issues and activities relating to the regulation of digital platforms [such as] how competition,
consumer protection, privacy, online safety and data intersect’ (DP-REG 2022, p. 1). At its first meeting,
DP-REG members identified transparency and accountability of digital platforms’ activities, the impact ofalgorithms such as in product recommendations and harmful content, and collaboration and capacity building
between the four regulators as priorities for 2022/23 (ACCC 2022c). The regulators involved have benefited
from using the forum to improve their assessment of emerging digital risks and deepen their engagementwith relevant stakeholders (eSafety Commissioner, sub. 87, p, 4; OAIC, sub. 173, p. 11).
Stakeholders have observed that improving coordination between government agencies that design andimplement policy and regulation would be beneficial more broadly across digital and data issues (not just for
digital platforms), and that it could provide a forum for more industry engagement. For example, theAustralian Information Industry Association suggested that:… the relevant people who are creating laws and policies that govern the tech sector should cometogether and work on any new regulation and industry needs to be part of that process. It wouldstop this fairly siloed, knee-jerk response to issues as they arise ... If you get better policy
outcomes and industry endorse it, then it’s good for government. (Smith 2022)
The Tech Policy Design Centre notes that both the DRCF and DP-REG comprise regulators only, and proposes acoordination model that includes both regulators and policymakers. Its preferred Tech Policy and Regulator
Coordination Model ‘takes an ecosystem wide approach [that] responds to calls for political leadership,
strengthened coordination, increased transparency, access to independent technical expertise, and regularised,meaningful input by industry and civil society [but] does not alter the independent mandates of existing policy
owners or regulators’ (Weaver and O’Connor 2022, p. 10). While the DRCF and DP-REG do not have a formal
mechanism for other stakeholders to participate, the proposed Tech Policy and Regulator Coordination Model
includes both an Expert Forum to seek regular input from industry and civil society, and an Advisory Panel thatwould provide ad-hoc technical expertise as required (Weaver and O’Connor 2022, pp. 12, 14).
In addition, more coordination between domestic policymakers and regulators provides a platform forAustralia to better engage with policymakers and regulators in other countries on technology and data
issues, which often spill across international borders in a digital world. This is important for collaborating on
global policy areas such as cross-border data flows, with the World Economic Forum highlighting that:…progressive cross-border data flows policy has come into its own as a policy lever for ambitious
governments seeking economic recovery. [However,] laws and policies that act as barriers to thistype of international data sharing are on the rise… slowing technological innovation and limiting
positive societal impact. (WEF 2020a, p. 5)
There can be cross-country differences in digital and data regulations and policy frameworks. While this often
justifiably reflects different countries’ priorities and constituents, it can create additional burdens for businesses
that operate in multiple jurisdictions. They may face extra costs in meeting inconsistent requirements, and potentiallywithdraw from smaller markets where regulations differ from those in larger markets because the costs outweighthe benefits of conforming to an additional set of rules. Greater international engagement between policymakers

91

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry reportand regulators would support the development of ‘interoperable policy frameworks that can streamline
requirements across borders and create mechanisms to reduce regulatory overload’ (WEF 2020a, p. 5).
Where cross-country inconsistencies in digital and data policies and regulations persist, international engagement
would help Australian government agencies to understand the varying requirements of other jurisdictions. If othercountries have adopted requirements on matters such as data security or consumer protections that differ toAustralia’s but partly or fully address local concerns, domestic authorities could take approvals from these othercountries into account when assessing whether a business has met Australian requirements. This approach isalready used in some other sectors requiring regulatory approval — for example, in medicinal manufacturing,
Australia’s Therapeutic Goods Administration has agreements with other countries’ authorities that allow it ‘to use
inspections conducted by these regulatory authorities as part of the [Good Manufacturing Practice] clearance
process in lieu of performing our own on-site inspection’ (TGA 2017). And in food safety, Australia has arecognition agreement with the US Food and Drug Administration, ‘recognising Australia’s food safety system andthe US food safety system are comparable/ equivalent to each other’ (DAWE 2022).
Finally, increased coordination between government agencies — and more engagement with industry andoverseas regulators and policymakers — can have financial and time costs. Some formal coordination
mechanisms need dedicated resources (such as a secretariat), and even models that simply involve regularmeetings between agencies will require existing staff to make time to prepare for and attend these meetings.
These costs should be weighed against the economy-wide benefits of improving coordination in determining
the appropriate model to be implemented.

Finding 4.19
Greater coordination in digital and data policy could support technology adoption
Existing coordination between Australian government agencies on technology and data issues only includes
regulators, not policymakers, and focuses on digital platforms. More coordination could reduce uncertainty
for regulated entities and improve engagement with industry and overseas, supporting adoption of
productivity-enhancing technologies. The benefits of this would need to be weighed against the potential
financial and time costs of greater coordination.

92

Appendices

Appendices93Modelling business technology adoption

A. Modelling business technology
adoption

This appendix provides additional details on the logistic regressions discussed in chapter 1. The regressionsuse 2019-20 Business Characteristics Survey data, which was accessed from the Business Longitudinal
Analysis Data Environment.
A logistic regression was estimated for each type of technology that businesses were asked if they used.18
Technology use was the dependent variable for each regression, with this variable taking the value of 0 if thebusiness did not use the technology and 1 if the business used it. The independent variables were a seriesof dummy variables indicating the industry, region and number of employees of the business. Baseline
categories were the primary industries industry, major cities of Australia region and 0 to 4 employees.
𝑇𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 𝑇𝑦𝑝𝑒= 𝛽0 + 𝛽1 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 + 𝛽2 𝐸𝑙𝑒𝑐𝑡𝑟𝑖𝑐𝑖𝑡𝑦, 𝑊𝑎𝑡𝑒𝑟 𝑎𝑛𝑑 𝑊𝑎𝑠𝑡𝑒 𝑆𝑒𝑟𝑣𝑖𝑐𝑒𝑠 + 𝛽3 𝐶𝑜𝑛𝑠𝑡𝑟𝑢𝑐𝑡𝑖𝑜𝑛+ 𝛽4 𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐿𝑜𝑔𝑖𝑠𝑡𝑖𝑐𝑠 + 𝛽5 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑆𝑒𝑟𝑣𝑖𝑐𝑒𝑠+ 𝛽6 𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 𝑀𝑒𝑑𝑖𝑎 𝑎𝑛𝑑 𝑇𝑒𝑙𝑒𝑐𝑜𝑚𝑚𝑢𝑛𝑖𝑐𝑎𝑡𝑖𝑜𝑛𝑠 + 𝛽7 𝐾𝑛𝑜𝑤𝑙𝑒𝑑𝑔𝑒 𝑆𝑒𝑟𝑣𝑖𝑐𝑒𝑠+ 𝛽8 𝑂𝑡ℎ𝑒𝑟 𝑆𝑒𝑟𝑣𝑖𝑐𝑒𝑠 + 𝛽9 𝐼𝑛𝑛𝑒𝑟 𝑅𝑒𝑔𝑖𝑜𝑛𝑎𝑙 𝐴𝑢𝑠𝑡𝑟𝑎𝑙𝑖𝑎+ 𝛽10 𝑂𝑢𝑡𝑒𝑟 𝑅𝑒𝑔𝑖𝑜𝑛𝑎𝑙 𝑎𝑛𝑑 𝑅𝑒𝑚𝑜𝑡𝑒 𝑎𝑛𝑑 𝑉𝑒𝑟𝑦 𝑅𝑒𝑚𝑜𝑡𝑒 𝐴𝑢𝑠𝑡𝑟𝑎𝑙𝑖𝑎 + 𝛽11 5 𝑡𝑜 19 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠+ 𝛽12 20 𝑡𝑜 199 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 + 𝛽13 200 𝑜𝑟 𝑚𝑜𝑟𝑒 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
Table A.1 – Relationship between business characteristics and technology use (1)Logistic regression results using 2019-20 Business Characteristics Survey dataa
CustomerEnterprise

RelationshipResource

Management

Planning

Electronic Data

Identification

softwaresoftware

Interchange

tags-2.62 ***

-2.47 ***

-2.62 ***

-3.35 ***

(0.16)(0.2)(0.16)(0.24)

0.84 ***-0.25

0.55 **-0.57 *

(0.19)(0.22)(0.19)(0.24)

Ind_Electricity_Water_and_

0.92 ***

-0.47

0.5 *

-0.38

Waste_Services(0.23)(0.29)(0.23)(0.32)

Intercept

Ind_Manufacturing

Radio Frequency

18 The technology types asked about in the 2019-20 Business Characteristics Survey were customer relationshipmanagement software, enterprise resource planning software, electronic data interchange, radio frequency identification
devices, cloud technology, cybersecurity software, data analytics, internet of things, artificial intelligence, 3D printing,blockchain technology and allowed respondents to indicate if they used other types of technologies or none of the above.
95

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

CustomerEnterprise

RelationshipResource

Management

Planning

Electronic Data

Identification

softwaresoftware

Interchange

tags

0.31

-1.14 ***

0.15

-1.23 ***

(0.21)(0.25)(0.21)(0.32)

0.83 ***-0.46 *

0.81 ***-0.46 *

(0.18)(0.21)(0.17)(0.22)

0.57 **-1.61 ***

0.46 **-1.12 ***

(0.17)(0.2)(0.17)(0.23)

Ind_Information_Media_and_

1.63 ***-0.25

0.45 *-0.64

Telecommunications(0.21)(0.26)(0.22)(0.34)

Ind_Knowledge_Services

1.75 ***-0.91 ***

0.45 **-0.9 ***(0.17)(0.2)(0.17)(0.23)

1.26 ***-1.49 ***

-0.01

-1.17 ***

(0.17)(0.19)(0.16)(0.21)-0.31 **

-1.33 ***

-0.07

-0.34

(0.1)

(0.18)(0.11)(0.21)

Reg_outer_regional_and_remo-0.66 ***

-1.16 ***

-0.27

-0.24

te_and_very_remote_australia(0.15)(0.22)(0.15)(0.25)

Employee_Size_5_to_19_

0.77 ***

0.92 ***

0.87 ***

0.84 ***

employees(0.09)(0.17)(0.1)(0.23)

Employee_Size_20_to_199_

1.36 ***

2.51 ***

1.42 ***

1.65 ***

employees(0.1)(0.15)(0.11)(0.23)

Employee_Size_200_or_more_

2.2 ***

4.31 ***

2.44 ***

3.28 ***

employees(0.09)(0.15)(0.1)(0.19)

N

5469

5469

5469

5469

McFadden’s pseudo R-

0.16

0.39

0.15

0.22

Ind_Construction

Ind_Supply_Chain_Logistics

Ind_Customer_Services

Ind_Other_Services

Reg_inner_regional_australia

Radio Frequency

squareda. ***, **, * respectively indicate statistically significant coefficient estimates at the 0.1, 1, 5% levels.
Source: Productivity Commission estimates using data in the ABS’s Business Longitudinal Analysis Data Environment.

96Modelling business technology adoption

Table A.2 – Relationship between business characteristics and technology use (2)Logistic regression results using 2019-20 Business Characteristics Survey dataa
Cloud

Cybersecurity

technology

softwareData analytics

Internet of things-0.59 ***

-1.22 ***

-2.57 ***

-2.32 ***

(0.11)(0.12)(0.18)(0.17)-0.2-0.1-0.49 *

-0.12

(0.15)(0.16)(0.21)(0.2)

Ind_Electricity_Water_and_

0.06

0

0.14

0.41

Waste_Services(0.18)(0.2)(0.26)(0.23)

Ind_Construction-0.24-0.51 **

-1.15 ***

-0.43

(0.15)(0.17)(0.27)(0.23)

-0.21

-0.14

-0.36

-0.62 **

(0.13)(0.14)

(0.2)

(0.2)

-0.41 **

-0.56 ***

-0.75 ***

-0.79 ***

(0.12)(0.13)(0.19)(0.18)

Ind_Information_Media_and_

0.69 ***

0.21

0.9 ***

0.32

Telecommunications(0.17)(0.18)(0.23)(0.22)

Ind_Knowledge_Services

0.73 ***

0.62 ***

0.28

-0.2

(0.12)(0.13)(0.18)(0.17)

0.09

0-0.63 ***

-0.56 **

(0.12)(0.13)(0.18)(0.17)

-0.14

0.04

-0.58 ***

-0.15

(0.08)(0.09)(0.15)(0.14)

Reg_outer_regional_and_remo

-0.16

-0.03

-0.36

-0.4 *

te_and_very_remote_australia(0.11)(0.12)(0.19)(0.19)

Employee_Size_5_to_19_

0.75 ***

0.58 ***

0.42 **

0.58 ***

employees(0.07)(0.08)(0.14)(0.13)

Employee_Size_20_to_199_

1.2 ***

1.32 ***

1.47 ***

1.01 ***

employees(0.09)(0.09)(0.14)(0.14)

Employee_Size_200_or_more_

1.73 ***

2.37 ***

3.13 ***

1.92 ***(0.08)(0.09)(0.12)(0.11)

N

5469

5469

5469

5469

McFadden’s pseudo R-

0.09

0.14

0.25

0.10

Intercept

Ind_Manufacturing

Ind_Supply_Chain_Logistics

Ind_Customer_Services

Ind_Other_Services

Reg_inner_regional_australia

employees

squareda. ***, **, * respectively indicate statistically significant coefficient estimates at the 0.1, 1, 5% levels.
Source: Productivity Commission estimates using data in the ABS’s Business Longitudinal Analysis Data Environment.

97

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Table A.3 – Relationship between business characteristics and technology use (3)Logistic regression results using 2019-20 Business Characteristics Survey dataa
Artificial intelligence

3D Printing

Blockchain technology-3.99 ***

-4.91 ***

-5.9 ***(0.29)(0.45)(0.76)-0.17

1.28 **

0.45(0.32)(0.44)(0.88)

Ind_Electricity_Water_and_

0.56

0.78

1.37

Waste_Services(0.37)(0.55)(0.88)

Ind_Construction-1.08 *

0.36

0.15

(0.46)(0.53)(1.01)

-0.16

-0.13

0.53

(0.3)

(0.5)

(0.83)-1.1 ***

-0.7

0.13

(0.33)(0.52)(0.83)

Ind_Information_Media_and_1.05 **

0.34

2.08 **

Telecommunications(0.34)(0.61)(0.8)

Ind_Knowledge_Services

0.94 ***

0.51

1.8 *

(0.27)(0.44)(0.74)

-0.46

-0.62

0.02

(0.28)(0.47)(0.8)-0.79 **

-0.52

0.01

(0.27)(0.38)(0.39)

Reg_outer_regional_and_remo

-0.58

0.1

-0.58

te_and_very_remote_australia(0.34)(0.39)(0.74)

Employee_Size_5_to_19_

0.59 **

0.81 **

0.77 *

employees(0.22)(0.31)(0.34)

Employee_Size_20_to_199_

1.04 ***

0.93 **

0.64

employees(0.24)(0.35)(0.44)

Employee_Size_200_or_more_

2.83 ***

1.93 ***

1.46 ***

employees(0.18)(0.27)(0.32)

N

5469

5469

5469

McFadden’s pseudo R-

0.21

0.10

0.08

Intercept

Ind_Manufacturing

Ind_Supply_Chain_Logistics

Ind_Customer_Services

Ind_Other_Services

Reg_inner_regional_australia

squareda. ***, **, * respectively indicate statistically significant coefficient estimates at the 0.1, 1, 5% levels.
Source: Productivity Commission estimates using data in the ABS’s Business Longitudinal Analysis Data Environment.

98Stylised simulations of economy-wide effects

B. Stylised simulations of economywide effects

Regional and remote digital infrastructure19
The Commission used a whole-of-economy model to simulate the increased use of technology and data inregional and remote areas that could result from improved digital infrastructure. This model is static, in that it
does not capture dynamic effects over time. Rather, the results are interpreted as if the effects of a shock to
the economy could happen overnight. While the simulation is stylised and there is a high level of uncertainty
in the impacts of the proposed recommendation and other model assumptions, the simulation provides
insight on how potential productivity improvements could flow through the economy’s structure and thedifferential impacts across industries and household types. Further details of the model, simulation andeffects of sensitivity testing are contained in this inquiry’s companion volume Whole-of-economy modelling.
In this simulation, the efficiency with which the ‘mining’ and ‘agriculture, forestry and fishing’ industries use
labour and capital was increased such that they could produce 0.5% more output using the same quantity oflabour and capital. While other industries operating in regional and remote areas are likely to benefit from
improved digital infrastructure as well, shocks to ‘mining’ and ‘agriculture, forestry and fishing’ industries were
simulated due to their much higher shares of labour (as a proxy for output) in regional and remote areas.
The increased productivity in the ‘mining’ and ‘agriculture, forestry and fishing’ industries resulted in a reductionin prices relative to the economy-wide consumer price index (CPI) of commodities produced by these industries(figure B.1, panel a) which, in turn, increased demand for their outputs. The increased demand came from both
domestic and foreign consumption: on the latter, lower relative prices of commodities produced by the ‘mining’and ‘agriculture, forestry and fishing’ industries meant that they were relatively cheaper in the foreign market,
leading to an increase in the quantity of these commodities exported.

19 Referred to as simulation 2 in this inquiry’s companion volume Whole-of-economy modelling.

99

5-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

Figure B.1 – Estimated change in output prices and real output by industrya
b. Real output

0.2

0.5

0.1

0.4

0.3

0

% change

-0.1
-0.2

0.2
0.1
0
-0.1

-0.4

-0.2

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG-0.3

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG% changea. Output prices relative to CPI

a. Industry abbreviations: AGRICU – agriculture, forestry and fishing; MINING – mining; ADVMAN – advanced manufacturing;
OTHMAN – other manufacturing; CONSTR – construction; TRANWH – transport and wholesale; RETAIL – retail trade;
HOSPIT – hospitality; TECTEL – technology and telecommunications; FINSVC – financial services; PRFSVC – professional,
scientific and technical services; SCHOOL – school education; VETUNI – technical, vocational and tertiary education; HLTHSS– health and social services; PUBADM – public administration; OTHSVC – other services; DWELLG – ownership of dwellings.
Source: Productivity Commission estimates.

The quantity of output produced grew across most industries, not only in the shocked industries (figure B.1,
panel b), due to aggregate demand effects, for example through household consumption increasing due tohigher incomes. However, this was not the case for the ‘advanced manufacturing’ and ‘technical, vocational
and tertiary education’ industries due to their relatively higher export intensity and the model’s assumptions
about fixed foreign investment.20 Across the entire economy, real GDP and real gross national income
increased by about 0.1% in this simulation. The magnitude of results depended on model and simulation
assumptions; for example, sensitivity testing found that the real GDP effect ranged from about 0.04 to 0.20%
with different assumed shock sizes, demonstrating the uncertainty in the simulations (chapter 4 of thisinquiry’s companion volume Whole-of-economy modelling).
Labour used by the ‘mining’ and ‘agriculture, forestry and fishing’ industries decreased because they required
less labour to produce the same amount of output. The increased demand for these commodities was not large
enough to induce an overall increase in demand for labour in those industries. Across the economy, there wasan overall increase in labour use and real wage rates (that is, wages relative to the economy-wide CPI) due to

20 Exports were a relatively large share of demand for these industries’ outputs (making up about a quarter of the valueof output before the simulated productivity increase). Assumptions in the model about fixed foreign investment mean thatmovements in the balance of trade are limited; therefore the increased exports of 'mining' and ‘agriculture, forestry andfishing’ commodities came with a fall in exports of other goods and services. For the ‘advanced manufacturing’ and‘technical, vocational and tertiary education’ industries, these falls were greater than increases in domestic demand.
100Stylised simulations of economy-wide effects

increased demand for other commodities. The increase in real wage rates contributed to the relative priceincreases for most industries that were not affected by the productivity shock.21
There was also an overall economy-wide increase in the capital stock. ‘Mining’ and ‘agriculture, forestry andfishing’ industries were relatively capital-intensive, so the productivity improvements in these industries led toproportionally large decreases in the need for capital in the economy to produce the same amount of output.
However, this was mitigated by increased demand for capital arising from increased demand for goods andservices across the economy, along with a lower relative price of investment and capital rental.
Households increased their real consumption of all commodities. The increase in real wage rates and overall
labour use resulted in real labour income increasing across all age groups, genders and education levels,
while the increased amount of capital held by households led to an increase in real capital income, despite
relative falls in the capital rental price. These increases in income (which more than offset increases insaving and income taxes) meant that households increased their consumption of all other commodities, evenwith the majority of these commodities seeing relative price increases. Household wellbeing increased as aresult of higher consumption, with the value of the increase estimated to be about $1.1 billion in 2018-19
dollars (that is, if this amount was given as extra income instead of the productivity shock, households would
be as well off as they were estimated to be after the productivity shock).

21 Relative prices of outputs produced by the ‘other manufacturing’ industry decreased (figure B.1, panel a). This industry

relies relatively heavily on ‘mining’ and ‘agriculture, forestry and fishing’ outputs as intermediate inputs (which constituted
about 25% of production costs before the simulation), so the falls in prices of these outputs flowed through to the price of‘other manufacturing’ outputs.

101Abbreviations

Abbreviations
ABS

Australian Bureau of Statistics

ACCC

Australian Competition and Consumer Commission

ACMA

Australian Communications and Media Authority

ACSC

Australian Cyber Security Centre

AI

Artificial Intelligence

ANZSCO

Australian and New Zealand Standard Classification of Occupations

ANZSIC

Australian and New Zealand Standard Industrial Classification

APRA

Australian Prudential Regulation Authority

ASD

Australian Signals Directorate

ATO

Australian Taxation Office

BLADE

Business Longitudinal Analysis Data Environment

CDR

Consumer Data Right

COVID-19

Coronavirus disease (an infectious disease caused by the SARS-CoV-2 virus)

CRM

Customer relationship management

CSIRO

Commonwealth Scientific and Industrial Research Organisation

DAT

Data Availability and Transparency

DP-REG

Digital Platform Regulators Forum

DRCF

Digital Regulation Cooperation ForumEDIElectronic data interchange

ERP

Enterprise resource planning

EU

European Union

GCCC

Government Cyber Coordination Centre

GDP

Gross Domestic Product

GP

General Practitioner

IT

Information Technology

IoT

Internet of Things

ICT

Information and Communication Technology

MADIP

Multi-Agency Data Integration Project

Mbps

Megabits per second

MBSP

Mobile Black Spot Program

MHR

My Health Record

1035-year Productivity Inquiry: Australia’s data and digital dividend Inquiry report

NBN

National Broadband Network

NDIA

National Disability Insurance Agency

NDIS

National Disability Insurance Scheme

NSC

National Skills Commission

OAIC

Office of the Australian Information Commissioner

OECD

Organisation for Economic Co-operation and Development

PC

Productivity Commission

PHN

Primary health network

PIP QI

Practice Incentives Program Quality Improvement

RCP

Regional Connectivity Program

RFID

Radio-frequency identification

SaaS

Software-as-a-Service

SME

Small and medium enterprise

SOCI

Security of Critical Infrastructure

STP

Single Touch Payroll

TSS

Temporary Skill Shortage

UK

United Kingdom

UN

United Nations

US

United States

USG

Universal Service Guarantee

USO

Universal Service Obligation

VET

Vocational Education and Training

104References

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adoption amongst small businesses – and how to overcome
them, November.
—— 2021b, Xero ecosystem survey: Summary of findings,
September.
Zhang, D., Mishra, S., Brynjolfsson, E., Etchemendy, J.,
Ganguli, D., Grosz, B., Lyons, T., Manyika, J., Niebles, J.C.,
Sellitto, M., and others 2021, The AI Index 2021 Annual
Report, March, AI Index Steering Committee, Human-Centered
AI Institute, Stanford University, Stanford, CA.

—— 2021b, Government Response to the Inquiry into Future
Directions for the Consumer Data Right, December.
—— 2022a, Consumer Data Right - Exposure draft legislation
to enable action initiation,
https://treasury.gov.au/consultation/c2022-317468 (accessed
16 December 2022).
—— 2022b, Consumer Data Right Strategic Assessment:
Outcomes, January.
—— 2022c, Statutory Review of the Consumer Data Right,
Australian Government, Canberra.
UC (University of California Presidential Working Group on AI)
2021, Responsible Artificial Intelligence, October.

113

Report No. 100 – 7 February 2023

5-year Productivity Inquiry:
Innovation for the 98%
Inquiry report – volume 5i5-year Productivity Inquiry: Innovation for the 98% Inquiry report

The Productivity Commission acknowledges the Traditional Owners ofCountry throughout Australia and their continuing connection to land,
waters and community. We pay our respects to their Cultures, Country
and Elders past and present.

The Productivity Commission
The Productivity Commission is the Australian Government’s independent research
and advisory body on a range of economic, social and environmental issues affecting
the welfare of Australians. Its role, expressed most simply, is to help governments
make better policies, in the long term interest of the Australian community.
The Commission’s independence is underpinned by an Act of Parliament. Its
processes and outputs are open to public scrutiny and are driven by concern for
the wellbeing of the community as a whole.
Further information on the Productivity Commission can be obtained from theCommission’s website (www.pc.gov.au).

© Commonwealth of Australia 2023

With the exception of the Commonwealth Coat of Arms and content supplied bythird parties, this copyright work is licensed under a Creative Commons Attribution
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An appropriate reference for this publication is:
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Vol. 5, Inquiry Report no. 100, Canberra

Publication enquiries:
Media, Publications and Web | phone 03 9653 2244 | email publications@pc.gov.au

ii

Contents

Contents
Prefaceiv

1.

The case for strengthening the diffusion of innovation

1

1.1

A focus on diffusion

1

1.2

Innovation and diffusion in Australia

6

1.3

The policy levers for diffusion are different from those for novel innovation 17

2.

3.

Enabling innovation diffusion in Australia

19

2.1

An enabling environment for diffusion of new knowledge and technologies 20

2.2

Facilitating the diffusion of innovations developed overseas

24

2.3

Diffusion through human capital

31

2.4

Collaboration and networks can catalyse innovation diffusion

41

Innovation and diffusion in government services

57

3.1

Public sector innovation and diffusion occurs, but is variable

59

3.2

There are major obstacles to innovation and diffusion that need to bereformed or managed

61

What is to be done?

66

3.3
Appendix

85

A.

87

Stylised simulations of economy-wide effects

Abbreviations

91

References

93

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iii

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Preface
Between 1 and 2% of Australian businesses innovate in ways that are new to the world. Such leading
innovations can promote productivity, but there are already many policies in place to promote them. What of
the neglected 98% for which the potential for, and desirability of, new-to-the-world innovation is weaker? Muchproductivity improvement involves the wider adoption of established, even dated, technologies andpractices among those millions of businesses.
There is a large group of Australian businesses whose management practices, uptake of technology andproductivity are below their best practice peers. For example, many businesses undertake little or noassessment of their performance, though this is a major motivator and route to improvement. It is notpossible for all businesses to achieve best practice because of large variations in managers’ and employees’
aptitudes and preferences, and the operating environments of firms. However, by incrementally improving
the performance of those businesses, higher rates of diffusion of best practice could significantly lift
aggregate productivity growth.
There are worrying signs that some of the principal vehicles for acquiring and transferring knowledge
are dormant or slowing. Machinery and equipment investment, which typically embeds new knowledge andbest practice, has collapsed as a share of GDP. Investments in intangible capital, like software and R&D,
have been stagnating. As workers move between businesses, they bring their experience with different
technologies and practices with them, sharing them with their new employer; yet, labour mobility between
businesses has been declining. So too has the degree of churn in markets as measured by the generally
falling rates of firm entry and exits. This is concerning because business exits and entries underpin an
entrepreneurial culture and uptake of innovations, and shift resources into activities more likely to generatevalue and productivity. The one positive sign is that the average level of skills in the workforce has been
gradually rising, which generally improves diffusion.
The solutions to these problems are different from the incentives, grants, venture capital funds and publicresearch institutes typically used to stimulate novel innovation. The most important are the settings that determine
the quality of the business environment because these determine the incentives, resources and capabilities offirms to invest in and adopt established innovations. Those policies encompass tax policy, the thousands ofstatutes and regulations that shape business options across almost all facets of the economy, trade andcompetition policy, skill formation settings, immigration and foreign investment policy. Policies that drive economic
efficiency more broadly are the focus of Productivity Inquiry companion volumes on the business environment.
Some aspects of the business environment are particularly relevant for enabling diffusion in the business sector.
As a small open economy with limited (business and public) research capacity, many ideas and technologies
will come to Australia from overseas. Linkages with overseas firms via trading relationships are important, as isforeign direct investment (FDI). Foreign investors have an incentive to channel knowledge, technologies andexpertise to Australian firms, as well as financial capital, to improve the prospects for a return on their investment.
More recognition of overseas standards, more streamlining of foreign investment approvals and the elimination of
nuisance tariffs would more rapidly diffuse overseas innovations.
Skilled migration policy should be reframed as a way of diffusing innovation and best practice among
Australian businesses. Businesses can be conceived as experimental laboratories in delivering goods andservices to consumers, so it makes sense to understand the lessons from as wide a variety of experiments asiv

Preface

possible. Skilled migrant workers transmit knowledge and the know-how to practically implement it from all over
the world. An expanded and adapted employer-nominated migration scheme would allow better matching of theskills and knowledge needed by employers and the unique capabilities held by migrants.
Information flows, including those arising from other businesses’ experiences with new technologies andpractices can be mediated by industry associations, consultants and experts (including academics). In
Australia, industry associations play a critical role in realising spillovers by drawing together insights from theirmembers’ experiences with innovation and helping firms to apply them to their own circumstances. The chief
problem is not that associations are deficient in this role, but that the potential recipient businesses often do notknow how far away they are from best practice. In their role as data collectors, the Australian Tax Office (ATO),
the Australian Bureau of Statistics (ABS), and various regulators have rich data that, in a curated form and withbusiness consent, they could return to businesses to tell them where they lie on the spectrum of performance with
their peers. No business wants to be last in the entrepreneurial race.
Innovation and best practice are equally important for the public sector. Australian governments are
the major funders (and providers) of a large part of the economy, including educational services, the justiceand defence systems, health, disability and aged care, and design and implement the tax and transfer
system. General government spending amounts to nearly $900 billion or over 40% of GDP, with much of this— some $445 billion — spent on delivery of services to the Australian community. Against this scale andbreadth of activities, even modest improvements in innovation and the diffusion of best practice will improve
the quality of outcomes for citizens and in some cases, reduce fiscal pressures. (It can also have knock-on
effects as best practice policy improves the business environment.)
There are many examples of effective innovation and diffusion in government. For example, the response to
COVID-19 led to rapid expansions in e-health and new models of schooling.
However, innovation and the uptake of best practice is often sluggish, patchy and inconsistent acrossjurisdictions. For instance, while it has limitations, activity-based pricing for public hospitals was a big step
forward for improved efficiency in the healthcare system, but it took 17 years before it was adopted by all
jurisdictions. Benchmarking of governments’ performance across multiple dimensions — school education,
elective surgery waiting times, prisoner education, support services for people experiencing homelessness— suggest many have failed to mimic the practices of the best. (While the public know that there are big
differences in performance, they know less about why and what could be done. Governments could readily
undertake more analysis to uncover what lies beneath.)
Slow progress reflects that governments face unique challenges in innovation and the adoption of bestpractice. Sometimes that is reasonable. Ethics sometimes demands some slowness because people’s
lifetime wellbeing may be involved, for example, a new mandated way of educating Australia’s 4 million
school students. Governments have contested, ambiguous and vague objectives such that success is hardto measure, and they often (reasonably) decide to prioritise different social and economic goals. Businesses
ultimately measure their success through profits.
But slowness also reflects structural defects. Uncoordinated actions of governments and agencies that share
overlapping roles, siloed services, clashing funding incentives and risk-averse cultural norms tend to work
against experimentation. Few publicly-operated services fear that poor performance will lead to their closure.
One solution is to re-configure some of the poorly designed ways of commissioning and funding
activities. In public infrastructure and defence procurement, billions are spent on deficient, slow or
over-budget projects because procurement models are far from best practice. In healthcare, the AustralianGovernment funds primary care mainly through the small business sector (GPs), while the States andTerritories are the primary funders of the most costly and sophisticated part of the system — largev

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

government-run public hospitals. It makes sense to keep people out of hospital where possible, but hospitals
have no incentives to prevent hospitalisation (and are in any case restricted in what they are allowed to do inprimary health). There are novel funding models that could reduce these perverse incentives.
Government agencies create barriers to recruiting people from overseas that are much greater thanthose for private sector occupations despite immigrants being some of the best conduits for fresh ideas inpolicy. Citizenship and security requirements are arguably too restrictive and could be relaxed.
Ideas have a peculiarity that one person’s use of them does not stop someone else from using them. Where
there is a sound public good basis, use of ideas should be free as this encourages diffusion andinnovation. Many Australian standards — which are an explicit way of codifying practices that should be
widely diffused — are priced. That, and the charging arrangements for the academic literature arising frompublicly-funded research, should be reformed.
There are significant productivity rewards on the table from improvements in diffusion, even modest ones.
This volume of the 5 Year Productivity Inquiry presents the Commission’s findings and recommendations forgovernment to support increased innovation and diffusion to improve productivity across the Australian economy.

vi

The case for strengthening the diffusion of innovation

1.

The case for strengthening the
diffusion of innovation

Key points
While novel, ‘new-to-the-world’, innovation is an important source of economic performance, it relates
to only 1 to 2% of Australian firms. The slow accumulation of existing knowledge across the economy— diffusion — is often overlooked as a source of productivity. It has the scope to lift the performance of
millions of businesses.
Diffusion of knowledge in the non-market service sector, which governments control, fund and often
run, can lift the quality of services central to Australians’ wellbeing (such as education and healthcare).
Diffusion of best practice regulation can also raise the efficiency of the private sector.
Australian businesses are not keeping up to the frontier of innovation, even in comparison to similarbusinesses in other countries. Yet they may not be aware of how far they lag behind. Many Australianbusinesses undertake little or no assessment of their performance, and overall management capability— a critical determinant of adoption of best practice — appears to be weak for a large share ofbusinesses, and significantly worse on average compared with the United States.
There are signs that the ‘diffusion machine’ has weakened, with slower growth of most of the key
factors driving diffusion — labour mobility, business exits and entries, and overall investment in capitalthat embeds new ideas (‘capital with brains’) — such as equipment and machinery, R&D and software.
The key policy levers for diffusion are different from those relevant to novel innovation. The quality ofthe business environment that affects knowledge flows and adoption — regulatory settings, skill
formation, immigration and foreign direct investment policy, and competition policy — is far morecritical than piecemeal interventions.

1.1

A focus on diffusion

Advances in knowledge and technology have been the main driver of economic growth and transformation
throughout history (Williamson et al. 2015). Brawn aside, workers’ contribution to output reflects what is
ultimately inside their heads, regardless of how it ends up there. Intangible capital — such as intellectual
property, training, software, and organisational methods — are major conduits for that knowledge. But so is
physical capital — all machines are the physical embodiment of knowledge. So, creating policy environments
conducive to the creation of new ways of doing things (‘innovation’), and diffusing and maintaining these, isthe key to being an innovative economy.
15-year Productivity Inquiry: Innovation for the 98% Inquiry report

In Australia, innovation policy has tended to give pre-eminence to interventions that foster the creation ofnovel productivity-enhancing ideas and technologies in selective parts of the business sector, including byleveraging the frontier research expertise in universities. Policies oriented towards novel innovation can beimportant for productivity growth,1 though are often inadequately tested for their appropriateness,
effectiveness and overall benefits.
One consequence is that innovation policies of seemingly general application turn out to have limited direct
relevance to large parts of the modern economy. As documented for the United States, and with equal
application to Australia, different parts of the economy innovate in different ways (Andrews, Chatterji and
Stern 2022). The manufacturing, ICT and some business service industries make considerable use of formal
R&D.2 Much of the services sector does not. Patents are prominent in manufacturing and IT development
industries, but of much lesser relevance in other parts of the economy (PC 2016a, p. 267). Hence policies
based on the commercialisation of patentable IP will tend to be narrow in their coverage. Where innovation
policy focuses mainly on cutting-edge scientific or technological breakthroughs, it tends to miss the way firms
in much of the economy are innovating on the ground.
As noted in this inquiry’s companion volume, Keys to growth, the Australian economy is increasingly
dominated by the services sector. Key questions for innovation policy are: what does innovation look likeacross the broad sweep of the services sector? How do service firms innovate? How do they identify andimplement changes to their service offering?
A narrative that concentrates on new-to-the-world innovation misses a significant piece of the
productivity-innovation story — the huge power of small changes across many firms. Fostering the adoption
and use — that is, the diffusion — of new and established technologies and ideas across the majority ofenterprises in the economy represents a significant opportunity to increase productivity (box 1.1). Thisapplies across all industries, but with particular relevance for services, such as in retailing, hospitality,transport and low-scale construction.
Diffusion will often involve the incremental adoption of already widely available, even dated innovations —for example, using accounting software to manage financials (rather than a ‘shoebox of cluttered accounts’)or creating a web page to improve the customer visibility of a business. But diffusion can also involve theabsorption and adaptation of existing cutting-edge technologies, such as artificial intelligence applications tobusiness processes. In this respect, diffusion and innovation are related concepts. A firm that adopts andpossibly adapts an existing idea is a beneficiary of diffusion, but at the firm or industry level is still an
innovator. Moreover, an innovative mindset and capability within firms often aids the absorption of new ideas
from elsewhere. And an economy with strong diffusion channels implies a market for new ideas, hence
greater incentives for new pathbreaking innovation. But a focus on diffusion is a good guide for innovation
policy. In many respects, it is the main game.

1

There is a vast literature on the impacts of novel innovation on firm performance and productivity. Significant work in this regard
includes Hall (2011); Hall & Mohnen (2013); Crepon et al. (1998); Janz et al. (2004); and Lööf & Heshmati (2006).
2 In 2020-21, three fields of research dominated Australian business R&D — information technology, engineering, and biomedical andclinical science — accounting for more than 80% of the total spending (ABS 2021c table 7). The industries in which these fields weremost concentrated were manufacturing, and professional, scientific and technical services, which in turn were the recipients of about
80% of all Australian governments’ funding of business R&D (ABS 2021c table 4).

2

The case for strengthening the diffusion of innovation

Box 1.1 – What we mean by innovation and diffusion
The standard definition of innovation is that it is the process whereby businesses, governments and otherorganisations and individuals generate or maintain value by creating, adapting or using available
knowledge and technology to introduce new or improved products (goods and/or services) or internalbusiness processes.a Importantly, this definition includes innovation that is new to the world, to Australia
or an industry, or even just new to the firm that is adopting and implementing the idea, production
technique or technology.
Such innovation goes beyond physical goods with wide recognition that it also encompasses new ways toorganise business processes and functions, and new marketing methods. Indeed, many importantinnovations have been of the organisational kind — for example, new ways to organise production anddistribution — as opposed to new products (goods and/or services) or production techniques(Fagerberg 2018, p. 7; Thomson and Webster 2013). Franchising, just in time inventory management, andweb-based sales are exemplars, now widely adopted globally and in Australia. The shift to working fromhome that occurred with the COVID-19 pandemic represents one of the more recent shifts in how work isorganised. While the productivity impacts of that shift are not yet clear, the Productivity Commission has
speculated that working from home may ultimately lead to productivity gains at the economy-wide level(PC 2021f, p. 3), and they have certainly saved commuting times for millions of people.
Innovation at the frontier of knowledge represents only a small share of innovation activity and innovating
firms in Australia (and in most countries, see OECD 2020). Innovation diffusion — the process by whichknowledge and technologies are communicated, adopted and adapted over time in an economy — is
how the vast majority of firms achieve productivity growth. Without diffusion, new technologies andknowledge would have less impact on productivity growth — innovation requires businesses and otheractors to implement or apply new ideas and technology that generate real returns (Hall 2004).
Modest incremental low-cost changes to a business’ processes, goods and services (‘micro innovations’)
that underpin much diffusion shift firms closer to the frontier, and can creep up on organisations because
they are adopted in response to the demands of others. Cash-free transactions, for example, became
essential for many organisations during the COVID-19 pandemic, as did online ordering andvideo-conferencing. The Restaurant and Catering Association told the Productivity Commission that mostcafes and restaurants now use Uber Eats/Deliveroo (R&CA, pers. comm., 9 June 2022) — a massive
uptake of technology compared with their previous models of delivery. Most regulators have relinquishedpaper forms (their own micro innovation), which in turn has required the regulated to go online. New
equipment incorporates new technologies that require workers to learn new skills and firms to makeorganisational changes to use the equipment effectively. For example, new heavy vehicles haveadditional safety measures that their drivers and owners must understand and use, while mechanics forsuch equipment must acquire new skills (and diagnostic equipment).
a. Consistent with OECD/Eurostat (2018). Process innovations include new or improved methods for producing
goods and services; organisational forms; marketing methods.

35-year Productivity Inquiry: Innovation for the 98% Inquiry report

Some proponents of new-to-the-world innovation policy have concerns about a focus on diffusion. In their view,
Australia will lag behind unless it develops successful new-to-the-world exports in growth industries. However,policies that help diffusion are not at the expense of businesses’ attempts to create flagship new-to-the-world
products, and there are already many polices aimed in the latter’s direction. And prosperity is not reliant on thegrowth in exports of such flagship products. Even if resource prices fall in the future, Australia — as a country
with a highly skilled workforce and other endowments — will continue to enjoy a comparative advantage in andexport a range of goods and services (including tourism, education and some professional and technology
services), as it imports goods and services that are produced better or more cheaply overseas.
Productivity gains in all of these sectors will be important and will be supported by more diffusion. Stylised
whole-of-economy modelling undertaken by the Commission for this inquiry found that potential productivity
improvements arising from more diffusion of new ideas, knowledge, business models, technologies andcapabilities would lead to increased real GDP, gross national income and individual wellbeing (appendix A).
For many organisations, diffusion involves lower risks, shorter lead times, less external funding and fewer
demands for a specialised workforce — making it attractive for the bulk of organisations. The strategy ofseeking out, adapting and implementing existing innovations appears to have been a successful strategy formany Australian firms (DIIS 2017). Indeed, the productivity slowdown may reflect a slowing of diffusion
processes rather than less fundamental innovation (as discussed further below).
Moreover, as a small, open economy with, by global standards, limited resources and R&D capacity, manyideas and technologies will come from outside Australia, underlining the importance of a global perspective
on diffusion. For example, the challenges posed by climate adaptation and mitigation will require theadoption and adaption of existing technologies as much as the development of entirely new ones.

Diffusion pushes more firms to the frontier
Diffusion increases the productivity of those organisations that adopt and adapt existing, but
new-to-the-business technologies and processes. This changes the relative proportions of low versus medium
versus high performing organisations in the economy, raising national productivity. Among any group oforganisations (comprising businesses, not-for-profit organisations and public sector agencies) there are somethat are at the frontier of performance. These make the best use of their resources, are dynamic andfuture-focused, and are quick adopters of others’ technologies. They may develop new-to-the-world
innovations, though that need not be a key feature of their operations. The more organisations in an economy
that are like this, the more productive is society overall, and the more rapidly it can absorb global technologies.
The bulk of organisations are behind the frontier, but by varying degrees — some close, some distant.
Closing the gap between their performance and that of the best would increase average economy-wide
productivity. That can occur through four mechanisms:3••••

exit by those entities that have few prospects of improving (and therefore ‘natural selection’ of the fittest)
entry by entities that are generally more efficient
growth in the capabilities of the viable but lagging surviving entities
through competitive pressures, increases in the market share of the most productive entities.

These mechanisms increase the average proximity of organisations to the frontier. One of the uniquefeatures of organisations run by the public sector, like schools, is that exits are rare and competition for themarket is not very important, and so diffusion can only occur through the other mechanisms.

3 These are ‘average’ effects. Businesses constantly face upward and downward shifts in productivity — for example,

demand shocks affect capital utilisation, there are supply disruptions, and key staff come and go.
4The case for strengthening the diffusion of innovation

Figure 1.1 is a hypothetical depiction of the process, underpinned by some quantitative assumptions, which
illustrates the effects of the above mechanisms. It illustrates that the reallocation of resources — from failingfirms to new firms that are more efficient — can be an important driver of economy-wide productivity. The
likely bigger effect arises when the surviving firms adopt better ways of producing their outputs and when themarket share of the most productive firms rises. More output is produced by firms approaching the frontier.
Figure 1.1 ignores a vital dynamic feature of real markets — the frontier moves out as there are new global
and domestic innovations. This creates new laggards. Global frontier technologies are not immediately
diffused to all firms, being first adopted (and if necessary, adapted to the domestic context) by the mostproductive firms in an economy, before diffusing to other firms (Saia, Andrews and Albrizio 2015).
Figure 1.1 – Diffusion and firm exits compress relative productivitya
A simulation

Share of businesses (%)

50

47

Facilitating exitsof the 'zombies'

45

Moving survivors
closer to the frontier

44

40

Productivity up 1.9%

Productivity up 5.9%

30
24
21

20

20
12

10
10

8

14

13

10

8

6

5

1

12

1

0
Status quo

After exits

Closing the gap

Very low performer

Low performer

Mediocre performer

Medium performer

High performer

At frontiera. The example assumes that exits are offset by entries, with entries more likely to be higher performing. The distributionof productivity performance is illustrative, with the assumed average relative productivity of any group relative to the mostefficient organisation being 0.45 for very low performers (that is, productivity just less than half of the best performer), 0.6
for low performers, 0.755 for mediocre performers, 0.855 for medium performers, 0.925 for high performers and 0.975 forthe frontier organisations. The changing shifts in the shares of organisations in each productivity grouping is assumed
but does not represent large shifts in the standard deviation of the distribution of productivity levels across organisations.
The average productivity of the ‘after exits’ case increases by about 0.16 deviations (based on the status quo distributionof productivity values) and by 0.35 standard deviations for the ‘closing the gap’ scenario.

The pace of diffusion differs across firms
There are many parts to firms’ decisions about adopting innovations. Where diffusion consists of making an
investment, this can give the business a ‘technology’4 that looks similar to frontier businesses. But theinvestment entails costs, such as any equipment or software purchases, staff re-skilling, and organisationalchanges needed for adoption. If those costs are not adequately offset by increased returns, then adoption
reduces the firm’s income, though it may still increase labour productivity.

4 Technology is broader than tangible investments in machinery and equipment. It includes all the ways in which anorganisation produces its output — their governance structures, skills, physical capital, intellectual property and so on.
55-year Productivity Inquiry: Innovation for the 98% Inquiry report

Organisations vary in their capability to absorb existing technologies and in their need for them. So for someorganisations, adopting an innovation later, if at all, may be a better strategy (Geroski 2000). This allows themto obtain new technologies at lower prices, to draw on a growing pool of people familiar with the technology andto use the lessons learned from early adopters, whether in Australia or more likely overseas. Waiting can also
reduce the risk of committing to path-dependent technologies that may be sub-optimal in the long run.
For other businesses, diffusion of a productivity-promoting technology requires complementary investments
and other changes to their processes, and the full set of investments may be too costly — particularly forsmall and medium enterprises (SMEs), which are the most common type of business in Australia (PC 2021d,
p. 5). For instance, effective digitalisation of businesses requires skills and integration of systems, yet nearly
60% of Australian SMEs experience ‘bad digitalisation’ (MYOB 2022).
Some firms are ‘satisficers’, and do not necessarily want to advance much towards the frontier or have little
realistic prospect of transforming their businesses. These might be pejoratively called ‘laggards’, but they
can serve people’s lifestyle choices and may improve labour market efficiency in some cases.
… some of the laggards with limited scope for growth, such as some family businesses, may still
support employment, in particular for workers with lower than average employability and inlagging regions. (Berlingieri et al. 2020, p. 20)
In meetings with various industry associations, the Productivity Commission was often told about businessowners — typically of smaller businesses — who have little time to put aside to focus on innovation or
future-looking business strategies. For these businesses, the impetus for change comes from external
advice (by their accountants for example) or from impending closure.
Moreover, in some cases, a new technology or organisational innovation has limited applicability to manybusinesses, such that their absence is not a problem. For example, the take-up of working from home — spurred
by lockdowns and COVID-19 infection risks — represented a new, or at least more frequently, adopted way oforganising work. Its diffusion amongst businesses was variable, but in many instances, a low rate of adoption isdesirable (or inevitable) given the nature of the businesses. Very few businesses in accommodation, foodservices and construction have any significant share of their workforce working from home as their businesses
rely on workers being physically present at the location of production (PC 2021e, p. 16).
The Commission’s analysis of cloud computing further illustrates the complexity of firm variations in adoptionof technology (McMillan et al. 2022). We found four groups of businesses — those who adopted cloudservices and benefitted from them (leaders), those who did not adopt and should not have (wisenon-adopters), those who adopted them but should not have (‘naïve’ leaders), and finally those that did not
adopt, but should have (true laggards). A policy and economic environment that limits the significance ofnaïve leaders and laggards will tend to improve productivity.
Finally, the resources for being at the frontier are scarce in Australia, regardless of whether the organisation
is private, public sector or not-for-profit. For example, one of the challenges for many social programs is thatthey rely on highly skilled and motivated staff and managers, who are in short supply, meaning that complete
diffusion of best practice is not feasible.

1.2

Innovation and diffusion in Australia

Most Australian businesses do not introduce new or significantly improved products or processes (the usual
measure of innovation). For example, in the two years ending mid-2021, almost 80% of Australianbusinesses did not introduce any (significant) new good or service, and over 60% did not introduce a newprocess (ABS 2022c). And far fewer Australian businesses are at the global frontier in respect to innovation
6

The case for strengthening the diffusion of innovation— over the same period, more than 98% of businesses did not introduce any goods or services that were
new to the world and almost 99% did not introduce any processes that were new to the world. Looking at thistiny group of firms therefore misses the bulk of those innovating.
When businesses do innovate, the vast majority of new products or processes are only new to the business— which is one measure of diffusion as such innovation draws on other established products and processes(figure 1.2).
Figure 1.2 – Most Australian business innovations are only new to the firma
Product and process innovation, 2 years ending June 2021
89.0
New to the business only
72.9
6.7

New
industry
withinAustralia,
new
New
to to
thetheindustry
withinAustralia,
butbutnotnotnewtoAustralia or totheAustralia
world or the world

Processes
16.4

Products

3.3
New to Australia but not new to the world
7.4
3.1

New to the world
8.4
0

20
40
60
80
Share of innovating businesses (%)

100

a. Process innovations include new or improved methods for producing goods and services; organisational forms; andmarketing methods.
Source: ABS (Innovation in Australian Business, 2020-21 financial year, Cat. No. 8158.0).

Compared with other countries, Australia receives a mixed report card on innovation and diffusion. The
World Intellectual Property Organisation paints a dismal picture of Australia as a weak diffuser — 78th in theworld in knowledge diffusion and 52nd in terms of knowledge absorption (WIPO 2021, p. 47). However, theWIPO definitions of diffusion and absorption5 are problematic measures in the sense meant by this reportbecause they only narrowly capture the ways in which diffusion and absorption of knowledge occurs in an
economy. Accordingly, these measures have the same bias that surrounds typical narratives of innovation,
accentuating high-technology and manufacturing, and ignoring the non-business sector and non-tradedsector despite their pre-eminence in modern economies like Australia.
Better measures of diffusion and diffusion capability paint a more sanguine, albeit still mixed, picture ofAustralia’s comparative diffusion performance.
Global comparisons of the uptake of certain digital technologies, such as business adoption of cloudcomputing and broadband connections, suggest that Australian businesses are moderate or fast adopters insome areas and slow in others. For example, in 2020 more than 70% of Australian businesses with
employment of 10 or more people had purchased cloud computing services, which places Australia in the
5 This diffusion measure is a weighted combination of the IP receipts’ share of total trade, production and export

complexity, the high-tech export share and ICT service export share. The absorption measure is based on the weighted
shares of trade for IP payments, high tech imports and ICT services, FDI net inflows as a share of GDP, and the share ofresearch talent employed in the business sector.
75-year Productivity Inquiry: Innovation for the 98% Inquiry report

top 5% of firms in the OECD.6 On the other hand, Australian businesses’ take up of more advanced digital
capabilities, like big data analysis and artificial intelligence (AI), lags most other developed economies(PC 2022a). The rate of AI adoption, for example, is relatively low with Australia in the 15th percentile among
OECD countries in 2020.
Overall rates of goods and services (product) innovation — which includes new-to-the-world,
new-to-Australia and new-to-the-firm innovations — among Australian businesses is about at average levelsof OECD countries (OECD 2022b). Process innovation is higher than the OECD average. However, theproduct innovations implemented by Australian businesses are more likely than other OECD countries to be
new-to-the-firm rather than new-to-the-world or new-to-Australia — indicating that diffusion, rather than novel
innovation, is relatively more important in Australia (though new-to-the-firm innovation still accounts for about
50% of product innovation among OECD countries) (OECD 2022b).

Managerial capability varies, but generally lags other countries
While it can be difficult to accurately capture the level of diffusion, particularly for micro innovations, at the firmlevel, firms’ management practices provide some indication of their capacity to make small productive changes.
Firms using advanced management practices have been shown to be more productive across a broad range ofcountries (Bloom, Sadun and Van Reenen 2017, pp. 16–17; Bloom and Van Reenen 2007, pp. 1368–1371;
Criscuolo et al. 2021, pp. 23–31; O’Neill, Sohal and Teng 2016), including Australia (Agarwal et al. 2014,
p. 6497). Management training also has large and persistent effects on firm performance over time
(Giorcelli 2019, p. 139). The OECD estimates that the productivity gains from upskilling managers could be
three times higher than for upskilling workers,7 with significant gains even in less knowledge-intensive services
like wholesale and retail trade and transport (Criscuolo et al. 2021, pp. 28–29).
Evidence on the practices of Australian managers suggests that many do not examine key performance
aspects of their businesses, which acts as a barrier to making changes (figure 1.3). A composite score ofoverall management capability among Australian businesses shows that capabilities are relatively low, atabout 0.3 (with the range of possible scores being between 0 and 1) (Agarwal et al. 2019). An increase in theoverall management capability score of 0.1 is associated with a 6.2% increase in labour productivity (ibidp. 28). However, there appears to be a gulf between actual deficiencies and perceived ones. In 2020, only
2.4% of Australian businesses said that shortages or deficiencies in business management skills adversely
affected their core business activities.8 This suggests that approaches to improve management practices
may need to go beyond providing skills but will also need to credibly reveal the deficiencies to managers who
do not recognise they have any.

6 Based on the OECD dataset for ICT Access and Usage by Businesses.
7 Criscuolo et al. (2021, p. 28) estimated that the productivity gains for a medium productivity firm associated withupskilling 1% of the workforce, either managers or workers, as 3% for managers and 1% for workers.
8 Surprisingly, this result does not vary with business employment size, though the need for management sophistication might
be expected to do so. The figures are drawn ABS Business Characteristics Survey from ABS Stat Data Explorer for 2020.
8

The case for strengthening the diffusion of innovation

Figure 1.3 – Many Australian businesses undertake little or no assessment of theirperformance
2019-20
Focus on Innovation measures

30.5

Focus on Cost measures

28.7

16.9

Focus on Human Resource measures

22.3

16.1

15.7

Focus on Financial measures

14.4

19.2
27.1

0

26.9

29.1

Focus on Quality measures

28.5

30.7
33.6

40

12.1
37.4
32.8

24.1

20

13.4

34

30.4

Focus on Operational measures

27.4

29.1

60

19.7

80

100

Share of businesses (%)
Not at all

A small extent

A moderate extent

A major extent

Source: ABS (Characteristics of Australian Businesses, 2019-20 financial year, Cat. no. 8167.0).

More detailed information is available on the distribution of performance in Australian manufacturing, which
illustrates a wide dispersion in managerial capability across firms (figure 1.4). In addition, while
entrepreneurship and managerial capability will always vary across business managers, the global evidence
suggests that there are opportunities to improve average capabilities and with that, improve upon the slow
accretion of better practices. In manufacturing, Australian firms are worse than the United States, which has
higher average capabilities (figures 1.5 and 1.6). Empirical work suggests half of the productivity gap inmanufacturing between Australia and the United States is the result of lower levels of management capability(Bloom, Sadun and Van Reenen 2017).

9

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Figure 1.4 – There is wide dispersion in managerial capability in Australiaa
Manufacturing firms

a. Lower scores reflect poor management practices.
Source: Based on data from 451 Australian manufacturing businesses from the World Management Survey (Bloom etal. 2021) and described in Bloom et al. (2014).

10

The case for strengthening the diffusion of innovation

Figure 1.5 – Closing the gap — there appears good scope for Australian firms to movecloser to the best practice management frontiera
0.8

0.7

Australia

Frequency

0.6
0.5
United States
0.4
0.3
0.2
0.1
0
1

1.5

2

2.5

3
Score

3.5

4

4.5

5

a. Density kernels based on data from 451 Australian and 953 US manufacturing businesses from the World Management
Survey (Bloom et al. 2021) and described in Bloom et al. (2014). Higher scores represent better management capability.

Figure 1.6 – Management capability in Australia lags behind our global peersa
United States

United Kingdom

Japan

FranceGermany

Australia

SwedenNew Zealand

Canada

Italy

United Kingdom

CanadaFranceSwedenAustralia

Poland

Italy

Spain

MexicoGreece

2.6
2.8
3.0
3.2
3.4
Management score (out of 1-5)

0
20
40
60
MFP gap explained by management (%)

a. Relates only to manufacturing. The right-hand side chart explains the extent to which the management capabilities ofbusinesses explain the divergence between manufacturing multi-factor productivity in each country and the United States.
Source: Bloom, Sadun and Van Reenen (2017).

11

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Investment in capital with brains and job mobility have slowed
Beyond managerial capabilities, there are other factors that underpin diffusion of knowledge acrossAustralian firms. Diffusion is also a product of investments in the resources that shift businesses’ productive
capabilities — ‘knowledge-based’ capital or capital with ‘brains’. These investments include the acquisition of
intangible capital in software, research and development, exploration, and artistic works, the skills ofworkers, and the knowledge embedded in machinery and equipment. While investments in the latter areoften not seen as a part of knowledge-based capital, they facilitate learning through use and reverse
engineering. (There are other forms of intangible capital, such as databases and managerial capabilities, butthese are incompletely captured by official statistics.)9
Putting aside investments in workers’ skills (which are not collected by the Australian Bureau of Statistics on
the same basis as other knowledge-based investments), overall investments in capital with ‘brains’ has beenfalling in recent years, especially R&D and machinery and equipment (figure 1.7). In contrast, investments inthe quality of labour — a summary measure of skill development and relevant to the creation and absorptionof knowledge — has been rising consistently over the past 15 years (figure 1.8).
Worker mobility between firms is another conduit for diffusion of knowledge, regardless of whether that isprecipitated by a firm exit. Workers acquire capabilities through formal learning and training, through job
experience and with personal experiences. When they move between organisations, they carry thosecapabilities across. There are two gains for the recipient organisations. They acquire variety — people withnew ideas compared with the incumbent workforce. They also benefit from matching efficiency. A worker
who finds their current job does not fully use their skills searches for more compatible and often more highly
paid jobs. If job mobility falls, especially for workers with less routine jobs, then this can disrupt this beneficial
source of diffusion and innovation. The evidence suggests that job mobility has been falling in Australia.10

9

Figure 1.7 does not capture shifts in the nature of plant and machinery over time, such as, say, a shift from large mining
trucks to supercomputers. Notably, while the mining share of equipment has fallen as a share of GDP, so has non-mining.
10 While labour mobility is likely to be a significant source of diffusion, it should also be recognised that high labour
turnover reduces the incentives for businesses to provide formal training (one of the reasons why governments
sometimes support industry training). Moreover, while knowledge unquestionably is carried by worker mobility, it is likelythat the marginal benefits depend on the levels of skills of the worker and the source business. For example, the periodic
movements of employees from one fast food franchise to another is unlikely to add much to the capabilities of theacquiring franchise.
12The case for strengthening the diffusion of innovation

Figure 1.7 – Capital with ‘brains’ has been fallinga,bCapital spending as a share of gross domestic product 1959-60 to 2020-21
14.0

12.0

12.0
10.0

Share of GDP (%)

Share of GDP (%)

10.0

8.0
Total capital with 'brains'
6.0
4.0

Machinery and equipment

4.0

1970

1980

1990

2000

2010

0.0
1960

2020

0.9

1.6

0.8

1.4
Exploration

0.6
0.5
0.4
0.3

1970

1980

1990

2000

2010

2020

Software

1.2

Share of GDP (%)

0.7

Share of GDP (%)

6.0

2.0

2.0
0.0
1960

8.0

1.0

R&D
0.8
0.6

Weapons systems

0.4

0.2
Art
0.1

0.2

0.0
1960 1970 1980 1990 2000 2010 2020

0.0
1960 1970 1980 1990 2000 2010 2020

a. Knowledge-based capital spending is often defined as the sum of gross fixed capital spending on computer software,
research and development, mineral and petroleum exploration, and artistic works. The individual shares of current pricespending on these to current price gross domestic product is shown above. In addition, investment in machinery andequipment and weapons systems also embody knowledge. While this is partly an outcome of knowledge-based capitalspending, much of these forms of capital are imported and provide an independent source of knowledge. Accordingly,
the combination of all of these forms of capital are referred to as investment with ‘brains’. Some important aspects ofsuch capital are not included, such as investments in workers’ skills and organisational capabilities.
Source: ABS (Australian System of National Accounts, 2020-21 financial year, Cat. no. 5204.0).

13

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Figure 1.8 – The latent capabilities of labour has been increasing slowly but steadilya
Annual changes in labour quality 1990-91 to 2020-21
0.7

Growth in labour quality (%)

0.6
0.5
0.4
0.3
0.2
0.1
0.0
1990-91

1995-96

2000-01

2005-06

2010-11

2015-16

2020-21a. The measure of labour quality is derived as the ratio of quality-adjusted labour inputs to hours worked.
Source: ABS (Estimates of Industry Multifactor Productivity, Australia, 2020-21 financial year, Cat. no. 5260.0.55.002).

Some indicators suggest slowing diffusion
Australia’s poor productivity performance may partly be attributed to weakening diffusion of frontier
technologies from overseas. The gap between global frontier firms and Australian firms (outside of theresources and financial market sectors) appears to have grown over time, with Australia firms catching up to
the frontier more slowly than previously (Andrews et al. 2022). This is a general trend, observed for OECD
countries more generally, with the concern that, while progress at the global technological frontier remains
strong, there has been a breakdown in the diffusion ‘machine’ so that catch-up has flagged (Andrews,
Criscuolo and Hansell 2019; van Ark, O’Mahony and Timmer 2008; OECD 2015b).
The widening gap between the global frontier and Australian firms does not appear to have occurred between
laggards and leaders within Australia. The dispersion in labour productivity levels across firms has fallen,
especially for wholesale trade, retail trade and construction (Campbell et al. 2019). Most of this reduction
reflects catch-up by the bottom 25% of performers. This could imply improved diffusion within Australia andhigher labour productivity growth than would have occurred had the gap not closed. However, it could also
reflect decreasing firm entry rates in these industries as new firms are more likely to engage in experimental
innovation activity, which increases dispersion (Campbell et al. 2019, p. 17) — implying a decline in innovation
overall. The labour productivity gap of firms at the 75th percentile and 25th percentile is still wide.

Business entry and exits
Business exits and entries are a potentially important dimension of business dynamism. New entrants
increase competitive pressures on incumbent firms, increasing their incentive to improve and reduce costs
through innovation (Aghion et al. 2005). New entrants also purchase a disproportionate share of old physicalcapital, providing an opportunity for incumbents to sell existing capital and buy innovative new capital (Ma,
Murfin and Pratt 2021). New and younger firms also tend to be innovative and more likely to adopt newtechnologies, with start-ups and entrepreneurs often bringing existing ideas to new places or industries.

14

The case for strengthening the diffusion of innovation

Recent empirical work also suggests that younger firms catch-up to the productivity frontier more quickly
than mature firms (Berlingieri et al. 2020). However, not all new entrants thrive — many exit soon afterwards
due to poor profitability and productivity.
There is some evidence of a weak downward trend in entry rates for employing businesses, but the rates arevolatile (figure 1.9). While probably much less important for business dynamism, entry rates for
non-employing businesses have risen significantly from 2012-13, partly due to the rise of self-employment in
the gig economy, particularly in the ride-share and other transport industries — as highlighted in Ellis (2021)
and this inquiry’s companion volume A more productive labour market. (The data for 2020-21 and 2021-22
are non-representative, reflecting the impact of COVID-19.)
Figure 1.9 – Rates of business exits and entries showed generally declining rates prior
to the COVID-19 pandemica
2005-06 to 2021-22
a. Non-employing businesses

b. Employing businesses

30

13

25

Entry rate
11

Rate (%)

Rate (%)

Entry rate
20

15

Exit rate

Exit rate7

10

5
2005-069

2010-11

2015-16

2020-215
2005-06

2010-11

2015-16

2020-21a. Based on measures of exit and entries over the ABS’s estimates of the counts of Australian businesses. There areminor discrepancies of numbers between successive statistical reports. The effects of the pandemic and various
government policy measures to stimulate the economy explain the uncharacteristic results for 2020-21 and 2021-22.
Source: ABS (Counts of Australian businesses, including Entries and Exits, various years, Cat. no. 8165.0).

Firm exit rates in Australia have been trending down for employing businesses (and been largely static for
non-employing businesses over the past five years). The downward trend partly reflects significant
reductions in business-related bankruptcies and personal insolvencies (box 1.2), though the share of totalbusiness exits accounted for by such business failures is small. In any case, the changes in bankruptcy andinsolvency laws in recent years have been to improve the efficient re-allocation of resources to avoid ‘fire
sales’ and to enable fundamentally sound businesses to be restructured.

15

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportBox 1.2 – The role of bankruptcies and insolvencies in firm exit
In 2018-19, prior to the onset of the pandemic, bankruptcies and insolvencies were already at theirlowest level since the late 1990s (RBA 2020, p. 33). By 2021-22, business bankruptcies and corporate
insolvencies were less than half their 2018-19 levels (figure 1.10).
Several changes to Australia’s insolvency and bankruptcy laws in recent years will have contributed tothe decline in business exits and will do so in future years. In particular, reforms to Australia’s corporate
insolvency laws in September 2017 gave companies more breathing space to undertake a formal
restructure rather than become insolvent (reforms introduced a safe harbour for company directors frompersonal liability for insolvent trading, and a stay on enforcement of ipso facto clauses).
Though its effects will not yet be obvious in the failure data, the introduction in January 2021 of a newformal debt restructuring process for small businesses is aimed at reducing exits of small businesses,
while a simplified liquidation pathway is aimed at speeding up liquidation (and the subsequent
reallocation of resources) for those businesses that do fail. The patterns in the past few years will also
reflect the influence of pandemic business support programs such as JobKeeper and industry-specificsupports, such as the COVID-19 Consumer Travel Support Program. Temporary changes were also
introduced to insolvency arrangements during the COVID-19 pandemic as part of the package ofbusiness support measures, which reduced business failures below counterfactual levels.
Figure 1.10 – Business-related bankruptcies and corporate insolvencies declined
between 2007-08 and 2021-22a
25

20

Numbers ('000)

Total

15
Corporate insolvencies
10
Business bankruptcies
502007-08

2009-10

2011-122013-142015-162017-18

2019-202021-22

a. The total is the sum of Business bankruptcies and corporate insolvencies. Non-business bankruptcies are
excluded. The estimate of bankruptcies for 2021-22 includes an estimate for the last quarter of the year.
Source: AFSA (2022) and ASIC (2022).

16

The case for strengthening the diffusion of innovation

Of the remaining exits, many will not entail failure as businesses can cease due to retirement of the owner,
re-structuring or the sale of a profitable business. Nevertheless, many other exits reflect poor productivity
and profitability arising from unanticipated demand and supply shocks or management deficiencies.11
Declining rates of exits will be problematic to the degree that low productivity businesses survive, slowing the
diffusion of best practice and using resources best allocated to more efficient businesses. While exits can beadverse for business owners and employees, they also build up entrepreneurial experience and encourage
the acquisition of new skills.
The overall picture is that a smaller share of businesses exit than 15 years ago, particularly for employing
businesses, which is where most activity in the economy is concentrated. Why that is the case and whether itreally interferes with the ‘diffusion machine’ is not clear. Some evidence suggests that the number of businesses
at the edge of financial viability (‘zombie’ businesses) has not risen as a share of all businesses since 2007, andthat these businesses have had limited adverse effects on aggregate firm performance (Bowman 2022).

1.3

The policy levers for diffusion are different fromthose for novel innovation

Policies for businessGovernments typically stimulate novel innovation through business tax concessions, grants and procurement
policies, and via funding of public sector research institutions and universities. These policies recognise that
innovation at the frontier involves especially high-risk activities, the returns from which are diluted because
other firms can adapt the ideas without paying for them. These policies are also helpful for diffusion, because
innovators absorb others’ ideas; but they are not the main policy levers driving diffusion.
In general, the policy approaches to diffusion relate to the broader economic environment influencing firm
behaviour and performance, which is a central concern of chapter 2 and other volumes of the Productivity Inquiry.
• Regulations can stifle or encourage diffusion. For example, a benign regulatory environment for foreign
investment not only increases access to financial capital but is a conduit for adoption of best practice frombusinesses that often operate globally.
• Skilled migration does not just bring people with valuable qualifications into Australia, but people with tacitknowledge acquired from working in overseas organisations with more varied management approaches,
technologies, and cultures than those available domestically.
• The education system is almost all about diffusion — spreading contemporary knowledge among people
and giving them the skills to learn new ones.
Governments may themselves play a role in business knowledge diffusion though extension programs,
regtech, and the provision of data and information that supports good decision making by firms (chapter 2).

Policies for non-market services
A large part of the economy and one central to many Australians’ wellbeing is not in the market sector, but
funded, organised and often directly provided by governments. In that case, governments act as the

11 One survey of CEOs who had experienced a business failure found about one quarter attributed it to lack ofleadership, 14% to a poor understanding of finance and about 10% to poor governance structures (Australian Centre for
Business Growth 2018).
17

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportequivalent of business managers and shareholders in private entities, with the same challenges ofmanagement quality, adoption and diffusion. Their management quality and capacity to innovate, adopt anddiffuse best practice is as important as it is for business (chapter 3).
In the case of the creation and diffusion of innovations for services provided or funded by government,
different considerations come into play than for private organisations.
• The incentives are different — the model of vigorous competition between private business rivals thatencourages adoption is hard to emulate for such services. Unlike most market activities, many
government functions are delivered through monopolies. The productivity effects of insolvency andbusiness exits on productivity are largely non-existent.
• There are also significant ethical issues in scaling up innovations unless they have a strong evidential
basis. For example, the universality of service provision means that adopting a new approach to teachingaffects the whole student population (who, given the compulsory nature of schooling, have no capacity to
opt out as customers do for most private sector innovation). The social license to innovate is different in
the public sector.
• Government agencies are more likely to have cultures antithetical to risk taking and innovation. Somerisk-aversion may be justified when considering the potential human and taxpayer costs of errors.
Nonetheless, the degree to which public service provision is overly conservative is something
governments can change through new governance and recruitment arrangements.
• Scaling up of innovation also appears to be more challenging in the public sector than in the private sector
because the specialised resources to replicate successful innovation are scarce, and because there arefew people devoted to the task of explicit diffusion.
• Complex funding arrangements and split responsibilities between levels of government increase thetransaction costs of diffusion, which have few parallels in business where joint ventures and collaboration
are typically managed through robust contractual arrangements that maximise value for the parties. And
while the multiple states and territories that make up Australia’s federation can be a source of innovation,
they can also make it costly to diffuse innovations (for example because of weak networking, incompatible
computing systems and different bureaucratic processes).
Given these unique aspects, the policy antidotes for limited government diffusion (chapter 3) share only
some commonalities with those that apply to private businesses (chapter 2). (Not-for-profit organisations
straddle both groups, so that the lessons from chapters 2 and 3 will often be relevant.)

18

Enabling innovation diffusion in Australia

2.

Enabling innovation diffusion inAustralia

Key points
Promoting diffusion of established technologies and practices across firms and industries requires
more generic policy settings than those that target ‘new-to-the-world’ innovation.
Commercial and market settings ultimately provide incentives for firms to seek out and adopt
innovations. But regulation and policy can either facilitate or unduly hinder the process.
Adopting innovations developed overseas is critical to Australia’s productivity. Linkages with overseas
firms via trade and foreign direct investment (FDI) give Australian businesses access to information andideas about innovation from the global frontier.
• Reducing trade barriers and FDI fees is important to maintain this channel for diffusion.
A firm’s workforce — its managers and employees — determine its abilities to identify, evaluate andabsorb external information and make the broader organisational changes needed to benefit fromtransformative technologies such as digital technologies.
• Skilled migrants often have knowledge of frontier technologies and practices and bring skills that are lacking
in Australia. Measures to facilitate skilled migration would promote innovation diffusion.
• Creating industry-agnostic research and training linkages to industry and removing barriers to university-industry
collaboration enable researchers to apply their capacity-building knowledge and skills to industry.
• Government training support should focus on transferable skills that augment the absorptive capacity offirms, such as digital and management skills.
Innovation diffusion depends on information. While industry organisations and business networks
facilitate information flows and spillovers, businesses may benefit from more tailored information to
help identify the need and opportunities for innovation.
• Data collected by government agencies can be used to help businesses benchmark their performance andprovide insights that promote innovation. Benchmarking tools should be accessible (e.g. online) and include
tailored results and case studies on best practice.
• Government can directly increase the pool of knowledge available to businesses by requiring open access togovernment funded research and by partnering with intermediaries like industry associations.

19

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

As noted earlier, the obstacles to the diffusion of already known innovations and the policy levers to addressthese obstacles generally take a different form to those widely used to stimulate new-to-the-world innovation.
In particular, the policies that promote diffusion of established technologies and practices in an economy
tend to be more general and broad-based. They aim to affect all firms in all industries, not just those creating
and commercialising new-to-the-world innovations.
These policies include:••••

broad conditions that maximise the incentive for firms to experiment and adopt innovations
facilitating the transfer of knowledge, skills and technologies from overseas
building critical skills for firm-level innovation — management capabilities in particularenabling the flows of information that support good decision making.

Many of these policy areas are covered in companion volumes for this inquiry, as they relate to broader issues
around creating a dynamic business environment (discussed in the A competitive, dynamic and sustainable
future volume), flexible labour markets (A more productive labour market) and an education system that meets
Australia’s skills needs (From learning to growth). As such, while the relevant recommendations to improvethese settings and their role in supporting diffusion are discussed throughout this chapter, the detailed analysis
underpinning these recommendations are found in the respective companion volumes.

2.1

An enabling environment for diffusion of new
knowledge and technologies

Framework conditions
The broad regulatory and financial environment in which businesses operate is important for diffusion. It
shapes the incentives, resources and capabilities of firms to adopt established innovations and adapt themto their specific circumstances.
While decisions to adopt and adapt innovative product lines and processes predominantly rest with firms,
governments can influence aspects of the environments in which these decisions take place, altering firm
incentives and barriers to adoption.

Business and regulatory environment for innovation and its diffusion
Market conditions and exposure to competition
The relationship between competition and adoption of innovation works in several ways. Where businesses
operate in a competitive environment, they face pressures to upgrade their product lines and processes (byreducing costs, or increasing variety or quality for consumers) or risk loss of market share to competitors that
do so. Conversely, in the absence of competition, there may be less market pressure for businesses toinnovate, but greater rewards for those who do.
Domestically, competition is not uniformly strong across product markets within the Australian economy.
Some Australian markets are highly concentrated, including in sectors where scale economies are strong(such as supermarkets), firm entry is highly regulated (such as in banking), or competition is inherently weak
due to natural monopoly characteristics (such as in electricity distribution and transmission).
But this does not, and need not, imply an absence of innovation. Increased market concentration at theaggregate level does not appear to result in lower firm entry — which would reduce sources of innovation

20

Enabling innovation diffusion in Australia

uptake (Bakhtiari 2020, p. 23). (See the Commission’s companion volume on A competitive, dynamic andsustainable future for the Productivity Inquiry.)
However, exposure to international competition via trade has the potential to be an important source ofinnovation diffusion. Import competition provides local firms with an incentive to adopt innovations as a way
to remain competitive, reduce costs and improve product lines and processes to maintain market share(Kiriyama 2012, pp. 15–16).
Exports also play a role. For exporting firms, access to overseas markets can expose them to more intensecompetition, while increasing the potential returns to innovation adoption due to a larger market size andallowing firms to spread the cost of innovation over a larger market (Bloom, Van Reenen and Williams 2019,p. 177). Innovation uptake is strongly correlated with exporting, with exporters 7–10% more likely tointroduce new or significantly improved products or processes than non-exporting firms (Tuhin 2016, p. 2).

Regulatory and administrative procedures
When done well, regulation can protect against harms without unduly affecting the incentive to innovate.
Indeed, while often not intended, regulation can even encourage diffusion due to its effect on the capabilitiesof businesses. Single Touch Payroll and My Health Record (both discussed in the inquiry’s companion
volume Australia’s data and digital dividend), and the growing importance of ‘regtech’ (PC 2020h, anddiscussed in chapter 3), have encouraged many businesses to go digital, or have lowered the costs ofcompliance, reducing businesses’ administrative inefficiencies. Competition policy limits the market power oflarge dominant incumbents, facilitating entry and discouraging complacency.
Nevertheless, poorly designed regulation can reduce incentives for existing firms to adopt
productivity-enhancing technologies and practices, and prevent new entrants from bringing innovative waysof doing things into an industry or country (OECD 2015a, p. 79). This is likely to be particularly limiting forlabour-intensive service industries where innovation diffusion relies more on adoption of new businessmodels and processes as a vehicle for experimentation (rather than large capital investment or traditional
R&D) (PC 2020f, p. 37). For example, adoption of new approaches could be hampered by regulations that:• create barriers to entry, for example, barriers to entry in retail pharmacy. On the one hand, pharmacy
regulations eliminate competition from other potential providers, stifling technology, while conversely, thepotential role of pharmacists to take on some clinical roles is limited by scope of practice restrictions• reduce the scope to use technology as a replacement or complement to labour input, for example,
because of workplace agreements• curb incentives of business managers and directors to take risks with innovative new approaches, forexample, because of personal or professional liability concerns, including in contracts with governments(AICD, sub. 44, p. 3; Consult Australia 2018, p. 8)• limit scope to employ staff skilled in new technologies or processes because their qualifications or skills
are not recognised in the relevant jurisdiction• presume the use of a particular technology to enable compliance, or specify the means by which
compliance must be achieved (compared with performance-based regulation, which specifies required
outcomes or objectives) (Attrey, Lesher and Lomax 2020, p. 6)• favour, through industry or product standards, incumbents using existing technology or processes• limit capacity to use an existing building or site in an innovative manner, for example, because of the way
the site is zoned or the need to undergo a lengthy redevelopment approval process.
As this list indicates, there is no single regulatory policy lever that drives innovation and diffusion. Rather, it isthe ‘hard grind’ of regulatory design and implementation on multiple fronts that makes a difference,
supported by strong frameworks like transparent regulatory impact analysis.

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5-year Productivity Inquiry: Innovation for the 98% Inquiry report

In many cases, progress is being made, such as Automatic Mutual Recognition of occupational licences,reforms to bankruptcy and insolvency arrangements over the past five years (box 1.2 in chapter 1) and theincreasing awareness of the need for technology-neutral regulation. Overall, regulatory barriers to firm entry
and expansion are generally lower in Australia than in most OECD countries (figure 2.1) (OECD 2018).
But the regulatory thickets caused by the accumulation (and combination) of past rules still limit thepathways for firm-based innovation. The unglamourous task of achieving greater regulatory neutrality in
specific areas is arguably more important to the economy’s innovative capability than many of the policies
aimed at high-end new discoveries.
Figure 2.1 – Australia has relatively light administrative requirements to set up
businesses but burdensome licensing and permit requirementsa,bOECD Product Market Regulation Indicators, sub-categories 2018
2.5

Index (0-6)

2.0

1.5
1.0
0.5
0.0
Overall PMR Indicator

Admin. Requirements for Limited
Liability Companies and PersonallyOwned Enterprises

Licenses and permits

Admin. Burden on Start-ups
Australia

OECD Average

OECD Top 5

a. Index scale from most to least competition friendly (0 to 6). 0 represents international best practice. Admin.
requirements measures the costs of complying with requirements to set up new businesses; licences and permits
measures the existence of measures to simplify licensing procedures. b. NSW data has been used by the OECD as
representative for Australia.
Source: OECD (2018) Product Market Regulation Database.

Access to finance
Uptake of innovative new product lines and processes can be costly to finance. For firms with relatively low
access to internal resources, including many small businesses and start-ups, access to external financecould be crucial to adopting new approaches. Well-functioning financial markets can therefore play animportant role in supporting business innovation uptake (Levine 2005, p. 871).
Australian businesses frequently report access to external financing as a barrier to innovation. One in fivebusinesses (19.7%) reported such problems in 2019–21 (figure 2.2) and this increases to almost 30% when
considering only firms engaged in innovation.12
These difficulties are more acute for firms that are small and/or young (Kido et al. 2020, p. 7). Small
businesses, in particular, typically do not have assets to use as collateral for debt finance, and unsecured

12 This is likely a lower bound estimate as it does not capture firms that were dissuaded from even seeking finance.

22

Enabling innovation diffusion in Australia

finance may not be available (PC 2021d, p. 2) or may attract a higher interest cost, reflecting the increased
risk for the lender (Connolly and Bank 2018). Small firms can also be more exposed to volatility than larger
firms, which can further raise the risk premium included in their cost of finance (PC 2021d, p. 9). In Australia,
the differential in the cost of finance (that is, the difference between interest rates charged on borrowed
funds) for small and large firms is larger than the OECD average (OECD 2021, p. 95).
Figure 2.2 – Businesses frequently report access to additional funds as a barrier toinnovation
Lack of additional funds as a barrier to innovation, 2019–21a

Share of businesses (%)

35

32.2

30
25.8

24.8

25
20
15.1
15

11.7

10.0
10

7.4

8.1

5
0
0–4 persons

5–19 persons
20–199 persons
Number of employees

Innovation-active businesses

200 or more persons

Non innovation-active businesses

a. Innovation-active firms are firms that reported one or more innovations, or firms with abandoned or ongoing innovation
activities related to product or process innovations.
Source: ABS (Characteristics of Australian Business, 2020-21 financial year, Cat. no. 8158.0).

Australia’s prudential rules for lending to SMEs are more stringent than international standards, which partly
explains the relatively lower availability of capital for SMEs — particularly for loans not secured by property(PC 2018, p. 35). Changing the underlying prudential requirements for SME business lending would
significantly improve SME access to finance (PC 2018, p. 32). Changes to capital adequacy requirements for
authorised deposit-taking institutions that commenced in January 2023 could support banks’ SME lending
going forward (APRA 2022). In particular, the risk weights applied to SME lending that is not secured byproperty have been lowered from 100% to 75% for lending less than $1.5 million in size, and 85% for lending
above this amount (APRA 2021, p. 36). This could facilitate more access to finance by SMEs and more
readily enable business uptake of innovation.
More broadly, Australia’s SME lending market is evolving as new lenders and loan products emerge and the
diffusion of overseas innovations in the use of data and AI opens up new ways for many SMEs to access finance(PC 2021d, p. 2). This includes lending against intangible assets (such as invoices and other expected receipts)
and on an unsecured basis. The Productivity Commission has observed that the relatively small funding market
for newer lenders in Australia could constrain lending to SMEs via these channels (PC 2021d, p. 3). Recent
government initiatives — such as the Australian Business Securitisation Fund (ABSF) — have sought to expand
the pool of capital available to these lenders through securitisation. In addition to investing in funding facilities thatare providing capital to SME lenders, the Australian Office of Financial Management — in administering the ABSF
— has also supported more standardised reporting of SME loan data, which could facilitate more accurate23

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportassessments of loan quality (by investors and credit ratings agencies) and therefore more willingness to provide
capital to these lenders (PC 2022d). This could eventually further improve SME access to finance and support
businesses that require additional capital to invest in innovation.
How these recent initiatives, including APRA’s changes to capital adequacy requirements and the activitiesof the ABSF, have affected SME access to finance is unclear, as it is too early to fully assess their impacts
across the Australian economy. The government should monitor the effects of these initiatives on SME
lending over time to understand whether they are having the desired result and whether adjustments orfurther responses are required to reduce barriers in accessing finance. This monitoring may require moredetailed and comprehensive data collection on business lending, for example by APRA, as existing datasets
are relatively aggregated and typically do not capture SME lending by smaller lenders (which new market
entrants tend to be) (PC 2021d, p. 46).

Finding 5.1
A business environment conducive to diffusion
The business environment provides the incentives and capabilities for firms to adopt innovations. The
policies that shape the business environment to promote diffusion of established technologies andpractices tend to be more general and broad-based than those that target new-to-the-world innovation.
They aim to affect all firms in all industries, not just those investing in creating and commercialising highly
novel innovations. Policies that promote openness and competition, implement well-designed regulationand improve access to finance all play a role.

Recommendation 5.1
An enabling environment for small business access to finance
The Australian Government should monitor the effects of APRA’s changes to capital requirements and risk
weights for loans to small and medium enterprises (SMEs) that are not secured by property, and theactivities of the Australian Business Securitisation Fund, to understand whether they are having thedesired impacts on SME lending. Adjustments or further responses could be required if barriers to SMEs
accessing finance remain. APRA may need to collect more detailed data about business lending to enable
the government to undertake this monitoring.

2.2

Facilitating the diffusion of innovations developed
overseas

As a small open economy, Australia has a comparative advantage as an importer and adapter of advanced
technologies and other productivity enhancing innovations, because our relative size means that it is not
optimal for us to invent everything domestically (Ferris, Finkel and Fraser 2016, p. 13; Hemmings andPark 2017, p. 10). The diffusion of innovation from overseas is facilitated by trade and investment between
Australian and foreign firms — particularly those firms that are at the global frontier for a given good or service.

24

Enabling innovation diffusion in Australia

Evidence from Andrews et al. (2022) showed that the productivity gap between the global frontier firms andAustralian firms is growing over time. The implication is that the gains from diffusion of technology fromoverseas are getting larger and more valuable over time. An Australian firm can make huge gains simply by
adopting processes and technologies from global frontier firms, or patterning its products and services on
theirs. Nevertheless, only 3% of innovating firms in Australia introduce processes and 7% of firms introduce
products that are new to Australia but not the world (figure 1.2). Most innovating firms use products andprocesses that are new to their firm only, implying that there may be potential for facilitating increased diffusionof innovation to Australia from foreign sources.

Trade connects Australian businesses to the global frontier
Importing and exporting goods and services are major channels through which trade can facilitate innovation
diffusion to Australian firms. Information and ideas about innovation are more likely to come from one’s supply
chain, that is, from suppliers or from customer firms (figure 2.9, below). Given that most innovation comes fromoverseas, it is particularly valuable for Australian firms to be importing from (or exporting to) firms overseas.
As importers, Australian firms can access frontier innovation via imports of capital goods and intermediate
inputs that embody new technologies. Using imported goods can give firms new ideas for product lines andprocesses (Kiriyama 2012, pp. 9–10), and facilitate innovation through imitation, ‘leading to product cycle, inwhich products are first invented in some parts of the world, and then imitated in others’ (Melitz andRedding 2021, p. 3). This also applied for services imports, which could become an increasingly importantchannel for diffusion of innovations from overseas as global trade in services increases in the future (asdiscussed in this inquiry’s companion volume A competitive, dynamic and sustainable future). For example,
in the technology industry, exposure to foreign ideas has already informed the creation of new products,
platforms and services in Australia:
Australian marketplaces Catch and Kogan were created out of businesses originally developed onebay.com.au. Similarly, the founders of Afterpay built and leveraged their knowledge of e-commerceon eBay to drive new innovations in payments while thousands of Australian pure play online
retailers have been able to grow from small to larger businesses on eBay. (eBay, sub. 114, p. 2)
Complex capital goods, like semiconductors, require advanced knowledge and some vendors are willing totransfer this knowledge so that importers can effectively use these goods (Kiriyama 2012, p. 10). Supply
chains are a major source of innovation diffusion even in the service sector. Supply chain management
systems like Systems Applications and Products (SAP) software create the potential for diffusion byfacilitating information flows across businesses.
Firms can also import intangible technology in the form of intellectual property licences, ‘increasing the poolof ideas’ for innovation (Kiriyama 2012, p. 14). Australia is a net importer of innovation, with payments forforeign intellectual property far exceeding the receipts of Australian intellectual property sales (figure 2.3).

25

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Figure 2.3 – Australia imports significantly more intellectual property than it exportsa
Intellectual property payments and receipts
4.5
4

USD billions

3.5

Payments

3
2.5
2
1.5

Receipts
1
0.5

1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

0

a. Charges for the use of intellectual property (BoP, current USD).
Source: World Bank (2021a, 2021b).

Barriers to trade take the pressure off domestic incumbents to adopt global best practice, by weakening
competition and by lowering product variety. The Indian motor vehicle industry provides a vivid international
example. Until the 1980s, the lack of import competition and diffusion meant that most Indian car manufacturers
used 1950s vintage technology (Sagar and Chandra 2004, p. 2). Australia was never so bad, but there is goodevidence that trade liberalisation promoted productivity in domestic firms (Bloch and McDonald 2001).
Indeed, Australia has successfully implemented reforms removing many of the traditional barriers tointernational trade in goods, such as import tariffs and quotas. But trade barriers can come in other forms.
Anti-dumping regulations still provide significant protection for some narrow product classes. Many barriers
to trade in services remain in place, particularly so-called ‘behind the border’ barriers, such as foreign
licensing restrictions. The key question is whether these and other trade barriers (for example, quarantine
provisions) have any material impacts. This is further discussed in the inquiry’s companion volume A
competitive, dynamic and sustainable future, which recommends the government reduces such barriers byimmediately reducing Australia’s statutory import tariffs to zero and progressively removing existinganti-dumping and countervailing measures.
Regulatory restrictions on particular types of technologies can also impede innovation diffusion from overseas— for example, outdated vehicle design rules that preclude a freight business from importing a vehicle that ismore productive than currently permitted vehicles (Terrill, Burfurd and Fox 2022, p. 29). Slow approval
processes for pharmaceuticals and other medical technologies can reduce the diffusion of interventions thatare more effective than existing ones, or can prevent us from resolving a shortage of any given pharmaceutical,
reducing the effectiveness (‘productivity’) of health care. Issues of regulatory barriers can be addressed bymore responsively and quickly updating compliance requirements for industry or, in some cases, could be
solved by more widely aligning with or accepting international standards, wherever practicable (see theCommission’s companion volume, A competitive, dynamic and sustainable future, which recommends thatgovernments increasingly accept product standards adopted in other leading economies as ‘deemed tocomply’, provided that a transparent review can be undertaken where a significant safety risk is identified.

26

Enabling innovation diffusion in Australia

For exporters, competition with goods and services from overseas provides exposure to new ideas andcreates incentives to adopt those ideas. And access to larger markets can make some technology adoption
more feasible, if the technology requires a larger scale to be viable (Bloom, Van Reenen and Williams 2019,p. 177). For firms in the business-to-business segment, they may be selling to overseas firms who introduce
them to more advanced systems and expectations. There is strong evidence that as firms become exporters,
their productivity increases significantly, in part due to the diffusion of innovation (Melitz and Redding 2021,
p. 26). For example, exporting by SMEs in the manufacturing and professional, scientific and technicalservices industries is associated with an increased probability of introducing new-to-market innovations
compared with non-exporting SMEs (Majeed and Breunig 2021, p. 15).
Finally, importers and exporters may learn about overseas innovations through more informal channels;
participating in trade conferences, business networks, and so on (discussed in section 2.4). Other Australianfirms may also learn about productivity-enhancing technologies or superior organisational and managerial
practices via knowledge spillovers from other trade-exposed Australian firms (Ciuriak 2013, p. 36; Saia,
Andrews and Albrizio 2015, p. 9) and simply inspecting new goods can generate ideas (Kiriyama 2012,
pp. 9–10). However, firms need to have sufficient ‘absorptive capacity’ to identify and incorporate theseideas and practices into their operations (section 2.3 and box 2.3).

Finding 5.2
Trade is an important source of knowledge diffusion
Trade enables Australian firms to access information and ideas about innovation from the global frontier,
via their suppliers and customers. Imports are an important source of diffusion of intangible technology,
with the value of Australia’s imports of foreign intellectual property far exceeding intellectual property
sales. And for exporters, selling to overseas customers and competing with overseas firms provides
exposure to new ideas and incentivises the adoption of product and process improvements.

Foreign direct investment is an important source of knowledge andexpertise for Australian firms
Looking at trade between OECD countries, Bournakis, Christopoulos and Mallick (2018, p. 14) concluded that
‘imports together with FDI [foreign direct investment] are crucial vehicles for diffusion of foreign knowledge’ (seealso PC 2020c, p. 7). This is because it involves a material level of control and influence13 by the foreign
investor, who is involved long term and provides much more than a source of financial capital to firms. FDI
brings expertise, new business models, technologies and processes as well as global connections, which canspread knowledge and good management practices to Australian firms. Majeed and Breunig (2021, pp. 12–13)
found that for the average Australian firm, foreign ownership was nearly as likely to result in the firm introducing
new-to-Australia and new-to-world innovations as firms conducting their own R&D.
Just as international trade in goods and services facilitates diffusion from the global frontier via several
interrelated channels, FDI can facilitate innovation diffusion to Australian firms via several interrelatedchannels. These include FDI that takes the form of investment in R&D; knowledge spillovers from13 FDI is investment in an enterprise or asset where the foreign investor has control or a significant degree of influence

over its management. Generally, investment is considered to be direct when an investor has 10% or more of the voting
power in an organisation.
27

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportmultinational corporations to domestic firms; and spillovers to competing firms in the same industry as thosereceiving FDI (Kiriyama 2012, p. 12; PC 2020c, p. 58). Given that over 50% of Australia’s inward FDI comesfrom advanced economies — the United States, Japan, the United Kingdom, the Netherlands and Canada(figure 2.4) — it is likely that FDI creates significant opportunities for technology spillovers.
Figure 2.4 – Over $450 billon of Australia’s inward FDI comes from the United States,
Japan and the United Kingdom
Australia’s main sources of foreign direct investment, 2020
200
180

AUD billions

160
140
120
100
80
60
40

20
0

Source: Austrade (2021c).

In addition, although the literature focuses on inbound FDI as the more significant channel for diffusing
innovations from overseas, outbound FDI also represents a potential source of new ideas and knowledge.
For example, Australian businesses making direct investments in overseas companies may learn about andbring back product and process innovations that can be implemented in their domestic operations. This
channel could become more important in the future as Australia increasingly exports equity capital, such as
through outbound investment from our growing superannuation funds (noting that much of this will occur as
outbound portfolio — rather than direct — investment, which would not have the same diffusion benefits).

Investment in R&D
Foreign investment in R&D can be a channel for diffusing innovation from the global frontier as it provides amechanism for innovations to be adapted to the Australian market, as well as transferring skills andknowledge to Australian firms.
R&D can facilitate diffusion of innovation by being a channel for multinational corporation investment toadapt innovations to the Australian market. For example, Neoen, which has invested more than A$3 billion inAustralian renewables since 2012, ‘has also tested and deployed batteries at a large scale and withsignificant innovation. These projects were undertaken in collaboration with Tesla and network operators’(Austrade 2021b). Similarly, Accenture has announced it will establish the ‘Accenture Adelaide Hub’, which‘will include the development of National Security Operations and Cyber Defence capabilities, new Advanced
Technology Centres of Excellence in areas such as Oracle, SAP, Splunk and Salesforce and Intelligent
Operations capabilities to develop and deploy advanced analytics and artificial intelligence’ (DTI 2020). As

28

Enabling innovation diffusion in Australia

well as creating novel innovations, these initiatives can serve to diffuse ideas and expertise from abroad to
the Australian market.
In 2019-20 about $351 million invested by businesses in Australian R&D came from overseas, representing
about 1.9% of the total spent by businesses on R&D in Australia (ABS 2021c), which is very low comparedwith the rest of the OECD (figure 2.5). This suggests that encouraging FDI may increase investment in R&Dfrom overseas sources that bring the potential for innovation diffusion.
Figure 2.5 – Compared with other OECD economies, relatively little Australian R&D
funding comes from overseasa

60
50
40
30
20

10
0

Israel
IcelandCzech Republic
Lithuania
LatviaAustria
CanadaFinlandUnited Kingdom
Hungary
Ireland
Slovak Republic
New Zealand
Belgium
NorwaySlovenia
GreeceNetherlands
Italy
SwedenUnited States
FranceGermany
Estonia
Spain
PolandSwitzerland
Chile
Portugal
Denmark
Luxembourg
MexicoAustralia
Korea
TürkiyeJapan

Business R&D from overseas (%)

Business expenditure on R&D from overseas sources, OECD 2019

a. OECD data: this table presents research and development (R&D) expenditure statistics performed in the businessenterprise sector by industry according to the International Standard Industrial Classification (ISIC) revision 4 and bysource of funds (business enterprise, government, other national funds, and funds from the rest of the world).
Source: OECD (2022a).

Knowledge spillovers
Inward FDI leads to interactions between multinational corporations and their domestic customers andsuppliers that can generate spillovers — sometimes referred to as ‘vertical spillovers’ (Criscuolo andTimmis 2017, pp. 71–72). These can include spillovers of technology, innovation, technical know-how andmanagement capability (PC 2020c, p. 58) that lead to improved general productivity for local firms(BCA 2010; McKissack and Xu 2016, p. 11; Roy 2016, p. 152). For example, multinational corporations may
demand more or better-quality inputs from suppliers, and may directly share knowledge and technology andencourage the adoption of new practices to achieve this (box 2.1).
FDI can have a direct impact on Australian workers’ skills and knowledge as foreign-owned firms provide
formal (such as seminars or courses) and informal (such as on-the-job) training to their workers (PC 2020c,
p. 62). In the services industry, spillovers can occur when multinational corporations partner with training
providers to improve the training and skills of their workers and of their customers’ and suppliers’ workers.
For example, in 2022 Apple expanded its partnership with RMIT University and the University of Technology
Sydney to deliver coding and iOS training in Australia (Apple 2022).

29

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportInnovation diffusion can also occur through ‘horizontal spillovers’ to their competitors. Local firms may‘observ[e] foreign firms, or diffusion might occur from labor turnover as domestic employees move fromforeign to domestic firms’ (Keller 2021, p. 10). A major potential channel for horizontal spillovers is the
movement of workers between firms (section 2.4). However, empirical evidence of these spillovers is harder
to observe (Gorg and Greenaway 2004, p. 1; Mistura and Roulet 2019, pp. 13–14), with some studies finding
supporting evidence for horizontal spillovers (Javorcik and Spatareanu 2008, pp. 12–15) and some finding
no evidence (Javorcik 2004, pp. 13–17; Newman et al. 2015, pp. 179–184).

Box 2.1 – Examples of FDI that potentially yielded broader spillovers
Foreign investment creates potential channels for knowledge spillovers, such as:• spillovers from multinational corporations’ FDI that creates hubs and networks for local firms:– GE Additive, a subsidiary of GE, has partnered with the University of Sydney to ‘establish
capabilities in metal additive manufacturing technology at the Sydney Manufacturing Hub, a space
for training specialists and academics working in additive manufacturing, and the incubation of small
to medium manufacturing enterprises’ (University of Sydney 2020)• spillovers from multinational corporations sharing capital goods, infrastructure and expertise:– Mitsubishi Heavy Industries has invested in Australian Green Hydrogen and Green Ammonia
projects (MHI 2020)• spillovers from multinational corporation investment in R&D:
– IP group (UK-based) and the Clean Energy Finance Corporation have ‘invested in Hysata …
[whose] advanced electrolyser technology has the potential to significantly improve the efficiency ofhydrogen production’ (Austrade 2021a).

Government has a role to play in FDI regulation
The Australian Government has an important role to play in keeping barriers to FDI low. Australia’s foreign
investment approvals process is seen to impose more significant screening processes than other OECDeconomies (figure 2.6) (IMF 2021, p. 22). These screening processes have been tightened in recent years
for a range of reasons, including during COVID-19. These restrictions arguably create an additional burden— in time, compliance cost and uncertainty — to potentially desirable investments.
The Australian Government also sets application fees for foreigners seeking to invest in Australia (regardlessof whether the investment is allowed to proceed). As discussed in the inquiry’s companion volume A
competitive, dynamic and sustainable future, these fees are in excess of recovering the costs incurred bygovernment in assessing applications and they continue to rise, which poses a risk of chilling FDI flows andlowering the associated productivity benefits. That companion volume notes that FDI application fees should
not be used as a tax base and recommends that adjustments (such as indexation to investment thresholds
and changing fee tiers) should be made to fees for FDI into agricultural land assets to bring them in line withother forms of investment.

30

Enabling innovation diffusion in Australia

Figure 2.6 – Australia’s FDI restrictions are mostly screening and approvala
OECD FDI Regulatory Restrictiveness Index, 2020
0.35

Index (0 - 1)

0.3
0.25

0.2
0.15
0.1
0.05

New Zealand
MexicoKorea
Iceland
CanadaUnited States
NorwayFranceAustralia
Austria
Chile
SwedenUnited Kingdom
Ireland
Italy
GreeceCosta Rica
GermanyJapan
Netherlands
IsraelDenmark
PolandColombia
Belgium
Lithuania
Czech Republic
Estonia
LatviaFinland
Türkiye
Spain
Portugal
Hungary
Luxembourg
Slovak Republic
Slovenia
Switzerland

0

Equity restriction

Screening & approval

Key foreign personnel

Other restrictions

a. Scores range from 0 (open) to 1 (closed).
Source: OECD (2022c).

Finding 5.3
FDI brings knowledge and new technologies into Australia
Foreign direct investment (FDI) is a critical channel for diffusing knowledge and technologies developed
overseas to Australian firms. While Australia is very open to foreign investment, with relatively high FDI asa share of the economy, its FDI screening and approval processes are viewed as more restrictive than inother OECD countries. Australia’s FDI fees are in excess of cost recovery and could risk chilling FDI flows.

2.3

Diffusion through human capital

Building Australia’s human capital can assist diffusion
The skills and knowledge embodied in the workforce — in economic terms, the stock of human capital — isfundamentally important for innovation adoption and productivity more broadly. Human capital is thetechnical and tacit knowledge of a firm’s workforce and management, which can be built through channels
such as formal education and work experience, and through connections and interactions with otherbusinesses, organisations and networks. It is a critical component of a firm’s ‘absorptive capacity’ (box 2.2)
— that is, a firm’s ability to learn from and capitalise on the innovation and research of others (Cohen andLevinthal 1989, pp. 569–570).

31

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportBox 2.2 – Human capital is the foundation of firms’ absorptive capacity
Human capital can improve a firm’s absorptive capacity in several ways.
• Having an in-house research capacity. This can increase a firm’s ability to identify and recognise
the value of new, external information; assimilate it; and apply it to their circumstances. For example,
undertaking R&D can facilitate innovation adoption to the extent that an existing research capacity
lowers the cost of finding and learning about existing technologies (Bloom, Van Reenen andWilliams 2019; Cohen and Levinthal 1990, pp. 148–149). In a meta-analysis of 241 studies oninnovation, knowledge transfer and absorptive capacity, Zou, Ertug and George (2018, pp. 97–98)
confirmed statistically significant positive relationships between measures of absorptive capacity andinnovation, as well as between absorptive capacity and the ability of a firm to recognise the value of,assimilate and apply external knowledge.
• Having employees with sufficient technical and tacit knowledge. The skills and knowledge
embodied in a firm’s workforce is also an important factor in how easily a firm can identify new andexisting technologies, learn the principles of how they work and how to use and adapt them to thefirm’s specific circumstances. While traditional innovation policy tends to focus on the stock of
researchers capable of undertaking R&D, the successful diffusion and productive use of newtechnologies also relies on the capabilities of the workforce more broadly (Criscuolo et al. 2021, p. 11;
Griffith, Redding and Van Reenen 2004, p. 890). Technical and tacit knowledge allows workers to
identify and learn about new technologies and practices, and to adapt them for the firm’s specificneeds and market. While this can mean employing researchers, engineers and technicians, firms canalso access needed skills and capabilities through collaborating with or contracting out their innovationneeds to other businesses, research institutes and universities.
• Having employees with specific frontier knowledge. For example, a firm’s employees may know
about existing technologies because of prior work experiences and connections with other businesses.
In fact, businesses get most of their ideas for innovation from their own employees or from businesses
owned by the same company (ABS 2022a). This is in large part a result of workers moving from one
firm to another and bringing the ideas and approaches of their previous firm to their new employer.
• Having high-quality managers and organisational capital. A firm’s management is an importantcomponent of absorptive capacity. Firms may need to adapt and re-organise production processes
and workflows to make the best use of newly adopted technologies. While this is particularly the casewith more complex technologies like IT and digital technologies (Andrews, Nicoletti and von
Rueden 2020, p. 10; Bloom, Sadun and Reenen 2012, pp. 196–197; Pellegrino and Zingales 2018,
pp. 14–23), better management — acquired through training or bringing on people with the necessary
management experience — independently increases productivity. Better management also
complements productivity gains realised from technology transfer, increasing the benefits fromadopting technologies embodied in capital goods (Giorcelli 2019, pp. 139–140). More generally, amore adaptable and creative workforce will be better able to adjust to new processes and products.
• Having diversity in the managerial cohort. Increasing the diversity of managers in firms canimprove the variety of skills, perspectives, tacit knowledge and innovative ideas within firms. Economic
theory predicts that too little diversity may prevent complementarities arising between different skill
sets, knowledge and practices (Alesina, Harnoss and Rapoport 2013, p. 2). There is an observed
productivity premium associated with greater diversity amongst managers (Criscuolo et al. 2021,
pp. 32–39) — though it should be noted that management diversity may be correlated with otherproductivity enhancing recruitment practices, making the size of this premium unclear.

32

Enabling innovation diffusion in Australia

The quality of a firm’s management is also a factor in how successfully new technologies are adopted andused by the firm. Managers have a disproportionate role in firm-level productivity to the extent that they are
responsible for ‘deciding what to do’ and ‘getting the organisation to do it’ (OECD 2019a, p. 8), including
decisions about innovation.
In Australia, innovation-active businesses report more frequently monitoring Key Performance Indicators(KPIs), offering performance bonus schemes and employing Principal Managers under the age of 50 years
compared with non-innovation-active businesses (ABS 2017). Moreover, better management practices
increase the likelihood that firms will introduce new-to-market innovations (Majeed and Breunig 2021, p. 12),or innovate at all (Gahan et al. 2016, p. 60).

Lack of skills and management capabilities is a barrier to the diffusion of
innovations
A high proportion of Australian firms report a lack of skilled labour as a barrier to innovation (figure 2.7), bothwithin their business and in the broader labour market. About one third of innovation-active firms14 report thata lack of skilled labour is a barrier, suggesting that a perceived skills deficit constrains the extent and/or
types of innovation undertaken even by businesses that are already innovating.
Figure 2.7 – Firms report a lack of skilled labour as a barrier to innovationa
2019–2133.1

35

Share of businesses (%)

30
25

24.3
21.1

20
13.2

15
10.2
10

6.4

5

0
Within the businessWithin the labour market

Innovation-active businesses

Within the business and/or labour
marketNon innovation-active businesses

a. Innovation-active firms are firms that reported one or more innovations, or firms with abandoned or ongoing innovation
activities related to product or process innovations.
Source: ABS (Characteristics of Australian Business, 2020-21 financial year, Cat. no. 8158.0).

Moreover, businesses that are not actively engaged in innovation are also constrained by a lack of skilled
labour, suggesting that a lack of appropriately skilled workers may also deter businesses from innovating in
the first place. Skilled labour gaps are felt more acutely as a barrier to innovation by SMEs than larger firms.
As noted by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO):
14 An innovation-active business is one that introduced any type of innovation and/or had innovation that was still indevelopment or abandoned during the survey reference period (here, the two years ending 30 June 2021).
33

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

It is difficult for small businesses to take up technology opportunities without adequately skilled
staff. (ASBFEO, sub. 64, pp. 3–4)
Another area of skill shortage, and one that may be less obvious to firms, is in management skills. As argued
in chapter 1 of this report, and previously discussed by the Commission (PC 2020g, pp. 20–22), limited
management capability may be holding back Australia’s productivity growth. Consultations undertaken forthis inquiry provided insights into some of the consequences for innovation of poor management capability.
Managers may struggle to re-organise their operations to make the most effective use of adopted
technologies. For example, the Australia Retailers Association (ARA) suggested that within their industry:
the COVID-19 pandemic, coupled with a huge appetite for digital transformation and use of digitaltechnologies, drove an increased online presence among their members, followed by a “secondwave” of technology adoption to deal with problems arising from systems that were hastily put inplace during the pandemic. (pers. comm. 6 June 2022)
A recent survey of 1500 Australian SMEs showed 59% of surveyed firms reporting that adopted digital solutions
were hindering them in some way, suggesting that the firm had not successfully integrated the innovation into its
existing processes. Moreover, 42% of surveyed businesses had given up on using some digital businesssolutions (MYOB 2022). This points to the risk that persistent gaps in management capability may lead somefirms to ‘over adopt’, or fail to benefit from adopted technologies, potentially deterring future innovation.
Moreover, limited management capability may mean firms fail to fully realise the benefits of their technology
innovations, even when the firm is at or near the global technology frontier. For example, the Interactive
Games and Entertainment Association (IGEA), which represents the video games industry in Australia and
New Zealand, suggested that while the industry was at the global frontier in terms of technical skills, somestart-ups are held back by management experience. According to IGEA, the ‘sector does not need help to get
on top of the latest technology or techniques for making games … it’s the boring things — management,
business skills — that [their members] may not always prioritise as much’ (IGEA, pers. comm. 7 June 2022).
The Council of Small Business Organisations Australia (COSBOA) suggested that smaller firms do not havetime to allocate to up-skilling themselves as managers and owners, because they often prioritise
training their staff first (COSBOA, pers. comm. 9 June 2022).

Finding 5.4
Management capability for successful technology adoption
Limited management capability is holding back some businesses from making good adoption decisions
and from getting the best outcomes from their investments in developing and adopting new technologies.
Firms with stronger management are more likely to make good decisions about whether or not to adopt
new technologies and practices, and when and how intensively to adopt them. Such firms are also more
likely to be able to make the broader organisational changes that are needed to benefit fromtransformative technologies such as digital technologies. Despite a huge appetite for digital transformationin many industries, skills and management capability gaps (and a lack of tailored information) has seensome firms lose out from adopting new digital technologies, reducing their willingness to pursue future
productivity-enhancing innovation.

34

Enabling innovation diffusion in Australia

Governments play an important role in building the human capitalthat enables diffusion of innovations
Governments play a pre-eminent role in developing the skills of Australians. Skills are a conduit fortransferring new knowledge as well as information about how to use novel innovations. Governments’ role
extends beyond funding and managing the education system (schools, vocational education and training(VET), and universities) to immigration policy.
Nevertheless, the design and funding of the education system is pivotal to innovation and diffusion.
Increasing the attainment and quality of education, including early childhood education, schools, higher
education and VET, increases workers’ capacity to identify and make productive use of new technologies
and practices. A highly skilled workforce may also make Australia a relatively more attractive destination forforeign investment (PC 2020c, p. 54), and for investment in projects with high skills requirements. The
Productivity Commission has undertaken a more detailed assessment of Australia’s education system’s rolein skills formation in this inquiry’s companion volume From learning to growth, and also through a review of
the National School Reform Agreement.

Skilled migration
Skilled migration is viewed narrowly as a means to resolving short-term skill needs. But more broadly thanthis, skilled migration is also a way of diffusing innovation and best practice among Australian businesses.
Businesses can be conceived as experimental laboratories in delivering goods and services to consumers,
so it makes sense to understand the lessons from as wide a variety of experiments as possible, particularly
those overseas. Australia’s skilled migration policy will therefore be central to the diffusion of innovation andfuture productivity performance.
As previously discussed, one of the key ways that firms learn about innovations is through the normal churnof workers between firms in an industry. When hiring a worker that has been working for a competitor, or
another segment of the industry, a firm may learn about new ways of doing things, techniques or equipmentthat it was not aware of. Australian firms find more innovation ideas from their own workers than from anyother source (detailed in figure 2.9 below); and for many of those workers, their innovative ideas are built on
knowledge and experience from their previous employers. ‘Knowledge spillovers’ from the movement ofworkers between firms has been documented to be one of the main ways that technology firms learn about
innovation and grow their productivity in the Silicon Valley, for example Saxenian (1996).
In many industries, the most technologically advanced firms in the world are overseas, and the majority ofinnovations are taking place in firms overseas. When local firms employ skilled migrants, they are also
bringing in some of the knowhow and ideas from overseas. For example, analysis from New Zealand findsthat the share of recent, high-skilled migrants (or returnee New Zealanders) in a firm is significantly andpositively associated with innovation. In particular, firms that employed returning New Zealanders were more
likely to introduce innovations that were new to New Zealand (McLeod, Fabling and Marr 2014, pp. 21–25).
In addition to knowledge of specific innovations from overseas, skilled migrants also bring valuable skills that
may be in short supply in the domestic market, including skills that limit firms’ ability to innovate (figure 2.7).
There may even be specific skills that only exist overseas in particularly innovative areas. As noted by theBusiness Council of Australia:… it will continue to be the case that much of the innovation occurs offshore, and the new skills
supporting that innovation will first be developed offshore. (BCA, sub. 16, p. 9)35

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

The Productivity Commission considers skilled migration policy in a companion volume to this inquiry, A
more productive labour market. That report recommends that the government shifts away from overly
restrictive and inflexible occupation lists for employer-sponsored temporary and permanent skilled migration.
Instead, the government should implement wage thresholds for employer-sponsored visas, whereby
employers can sponsor overseas workers in any occupation as long as they are paid above the relevant
threshold (with a lower threshold for temporary migration and permanent migration thresholds to increase
with age).
Implementing this recommendation would mean that firms could hire skilled migrants with any skill or
knowledge that they would be willing to pay above the wage threshold for, without waiting for a skill list to be
updated. But importantly, such a change would also allow firms to hire workers with valuable knowhow, even
if their skills on paper do not seem to be very different from local workers. The local beer manufacturer who
hires an engineer from a plant in Europe is aware that they are thereby gaining new knowledge. If the firm
judges any worker’s knowledge and skills to be worth paying a substantial premium for, that type of worker
would qualify for skilled migration under the proposed changes. These changes to skilled migration policy
would clear the path for substantially more diffusion of innovation from overseas.

Researchers in industry
For firms engaging in more technical or adaptive types of innovation, an in-house research capacity may beneeded to better identify and evaluate new information and apply that information to their circumstances. For
such firms, employing researchers may be a particularly important component of their absorptive capacity.15
Increasing the supply of industry-ready researchers may complement other government incentives for firms
to undertake in-house R&D activities via industry policies such as the Research and Development Tax
Incentive (box 2.3).

Box 2.3 – Absorptive capacity and the R&D Tax Incentive
While business investment is R&D is widely recognised as a crucial input to technological innovation —particularly highly novel innovation (Majeed and Breunig 2021, p. 2) — it also plays a role in innovation
diffusion through two channels. First, business R&D may involve adapting existing innovations to fit afirm’s specific circumstances or market. Second, undertaking in-house R&D may increase a firm’s ability
to identify and recognise the value of new, external information, to assimilate it, and to apply it in theiroperations. To the extent that this lowers the cost of learning about new technologies, R&D can facilitate
innovation adoption and catch-up to the national frontier (Bloom, Van Reenen and Williams 2019; Cohenand Levinthal 1990, pp. 148–149).
In Australia, the main policy lever for business R&D — and for business investment in innovation more
broadly — is provided through the Research & Development Tax Incentivea (R&DTI), which aims toencourage businesses to undertake R&D that may not be viable for an individual business, but may yieldoutcomes that have a wider benefit to Australian society (PC 2017a, p. 23). The R&DTI lowers the costof undertaking R&D and, through a refundable tax offset, alleviates liquidity constraints for
cash-constrained start-ups and SMEs. It also provides concessions to improve the asymmetric tax

15 As discussed in more detail in section 2.4, businesses can also access those skills through collaborating with

universities for innovation.
36

Enabling innovation diffusion in Australia

Box 2.3 – Absorptive capacity and the R&D Tax Incentive
treatment of profits and losses and the bias this creates against risk taking in the economy, including
R&D (Business Tax Working Group 2011, p. 13).
Previous reviews of the R&DTI, and consultations undertaken for the inquiry, have raised a number ofconcerns with the program, including limited additionality (Ferris, Finkel and Fraser 2016, p. 14) and thestifling effects of some aspects of the program’s administration, including uncertainty about eligibility andthe ex-post compliance assessments that may require small firms to retrospectively pay back their offset(ASBFEO 2019, p. 5).
Given the importance of policy certainty and history of tinkering with the R&DTI, additional changes beyond
those previously recommended may be unwise. However, given the connection between researchers andabsorptive capacity, one option worth considering concerns changes to eligibility criteria. Currently, theprogram uses a broad concept of eligible expenditure, allowing almost any type of expense that is directly
relevant to an eligible R&D activity except interest payments and the purchase of capital assets (Ferris,
Finkel and Fraser 2016, p. 12). Focusing eligibility criteria on personnel costs could stimulate additional
absorptive capacity by bringing additional researchers into firms. However, prior research suggests anincreasing focus on personnel with a limited supply of researchers may just lead to higher wages rather
than additional R&D activities, reducing the effectiveness of public support (Ferris, Finkel and Fraser 2016,
pp. 12–13). Further work would be required to assess the elasticity of supply of researchers.
a. The R&D Tax Incentive is jointly administered by the Australian Tax Office and AusIndustry.

There is substantial scope to increase the industry-readiness of researchers by ensuring that people withpostgraduate qualifications are provided with pathways to engage with industry. Some industries alreadytend to have large numbers of post-graduate educated employees, particularly education, professional
services, financial services and health care (figure 2.8). But linkages could be improved by creating moreconnections between students and industry when they are engaged in study. Data from the Department of
Education, Skills and Employment indicate that less than 14% of higher-degree research students engage
with end users in some way (DESE 2022a). Although the number of university-industry researchcollaborations have been increasing (ARC 2018), there is still scope to create more linkages between early
career researchers and industry.
To increase the supply of researchers with industry-relevant research experience and increase knowledgecommercialisation, the federal government committed $296 million for the National Industry PhD Program
under its University Research Commercialisation Action Plan (DESE 2022d, pp. 89–95). The program will
support 1800 PhD candidates and 800 industry fellows to undertake industry-focused research projects overthe next 10 years, with preference given to applications aligned with the National Manufacturing Priorities.
Creating researcher training with linkages to industry increases the likelihood that researchers can become
employed in industry, which then helps diffusion take place. For example, Monash University’s Graduate
Research Industry Programs, which establish and facilitate student scholarships for PhD students inparticular industries, have had a high success rate linking PhD students to industries such as water
sustainability, food and dairy, sustainable public transport, chemicals/plastics/polymers, digital health andbehaviour change for sustainability (Monash University, sub. 184, pp. 8–9).

37

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Figure 2.8 – Education, professional and financial services, and health care have large
numbers of postgraduate trained workers
People employed with postgraduate education relevant to the job, 2018-19
Education and training
Professional, scientific and technical services
Financial and insurance services
Health care and social assistance
Public admin and safety
Information media and telecommunications
Electricity, gas, water and waste services
Arts and recreation services
Wholesale trade
Manufacturing
MiningAdmin and support services
Rental, hiring and real estate services
Agriculture, forestry and fishing
Retail trade
Other services
Accommodation and food services
Transport, postal and warehousing
Construction
0

5

10
15
20
25
Share of employees (%)

30

35

Source: ABS (Qualifications and work, 2018-19 financial year, Cat. no. 4235.0).

However, increasing innovative outcomes and diffusion by better leveraging highly skilled researchers inindustry likely requires more than supply-side measures — business demand for and capacity to use
researchers’ skills also matters. Moreover, the program may be of insufficient scale to make a significant
difference to industry (Howard 2022; IRU 2021, pp. 7–8). Preferencing applications aligned with the National
Manufacturing Priorities restricts the range of industries, disciplines and types of research activities and that
may benefit from the program — services industries and social sciences researchers, for example, are lesslikely to participate in the program.

Recommendation 5.2
An industry-agnostic approach to National Industry PhD Program
The Australian Government should actively promote innovation diffusion across a range of industries as part ofits role in capability building. By adjusting the National Industry PhD Program so that it is industry ‘agnostic’ anddoes not preference applications aligned with the National Manufacturing Priorities, the Government could
encourage diffusion of new knowledge and best practice into the services and social sciences.

38

Enabling innovation diffusion in Australia

Improving the capabilities of the existing workforce
There is a large market for workforce development and training in Australia, with 23% of Australians aged
15–74 undertaking work-related training16 in 2020-21 (ABS 2022e). Moreover, supply chain partners,
consultants and industry associations offer training to build the capabilities of firms, and in some cases, allow
firms to ‘outsource’ certain management skills (box 2.4).

Box 2.4 – Businesses can seek private solutions in the market to build capabilities
for innovation
Lifting workforce capabilities does not always require government involvement. In fact, firms are able toaccess a range of private solutions to build the skills of their workforce and managers, or outsource tasks
requiring skills lacked by the firm.
• For larger firms in particular, consultants provide an outsourcing opportunity, creating a quick andeasy way to bring skills and knowledge into the firm. And smaller firms often source outside expertise(in accounting, for example).
• Local business networks and industry associations provide a range of services — for example, theprovision of advice and some consulting services — that are more accessible than consultants tosmaller, resource-constrained firms.
• Participating in supply chains provides opportunities for up-skilling through formal training and informal
mechanisms, like incidental exposure to better management practices. For example, the Australian
Digital and Telecommunications Industry Association (ADTIA) told the Productivity Commission thatthe digital, smart products and subscription TV and streaming sector requires additional training for
local cablers through both enterprise internal training and the VET system because customer
expectations of cablers often exceed installation practices to include information about the products
themselves (ADTIA, pers. comm. 24 June 2022).
Given the importance of lifting the capabilities of smaller, resource-constrained firms, industry
associations play an important capability-building role.
• The Interactive Games & Entertainment Association (IGEA) offers short courses on how to run astudio, runs webinars on areas where support is needed (such as in applying for grants and project
management skills), and ran an education summit to bring together educators to ensure consistency
and that available offerings target the industry’s skill needs.
• Some industry associations, such as the Restaurant and Catering Association and the Australian
Retailers Association, deliver nationally recognised training in the VET sector as registered training
organisations (RTOs). The Council of Small Business Organisations Australia (COSBOA) suggested
that running a RTO was one way that industry associations can better enable diffusion. Partnering withexisting RTOs is another common strategy.

If governments invest in building capabilities for innovation outside of the broader education system, theyshould prioritise policies and programs with the highest expected social return. Given the potential effect on

16 Work-related training is training which did not form part of a qualification and was undertaken for work purposes.

395-year Productivity Inquiry: Innovation for the 98% Inquiry report

productivity of improving management capabilities, programs to address skills gaps in the firms that will mostbenefit from it — namely, SMEs — may be one way to generate a high social return.17
In this context, many of the Australian and State and Territory government programs that aim to build
workforce skills target particular segments of the workforce — such as mature or young workers — orprovide services to help small business owners and managers improve the overall performance of theirbusiness (box 2.5). Such programs may help to build firms’ innovation capabilities if they:• target skills needed by businesses to effectively adopt and integrate new technologies, such as digital skills• help improve management skills• help businesses to identify opportunities to innovate as a way to reduce costs and improve performance.

Box 2.5 – Programs that may help build skills businesses need for innovation
General programs
Various government programs that provide support to upgrade skills and improve business performance may
also build the skills and management capabilities needed to successfully identify and adopt innovations.
For example, the Australian Government’s JobTrainer Fund, which was introduced during the
COVID-19 pandemic, provides financial support for job seekers and young people (including schoolleavers) to upskill or reskill in areas of identified skills (DESE 2022b), whereas the Skills and Training
Incentive Program assists mature age Australians to update their skills and stay in the workforce(DESE 2022c). To the extent that these programs target skills needed by businesses, they may also
support innovation capabilities.
Other programs indirectly support management capability by providing information and services that help
businesses to identify opportunities to improve business performance — including through innovation.
For example, the ATO’s Small Business Benchmarking provides free benchmarking for small
businesses on industry-relevant performance indicators, including guidance on when a business may
have room to improve (ATO 2022).
State Governments also play a role through a variety of programs including advisory and concierge services
to small businesses, such as the NSW Government’s Business Concierge and Business Connect
programs (Service NSW 2022). In addition, initiatives that encourage small businesses to access specialist
advisers and business support services (such as financial, accounting, strategic or management advice) —including the Tasmanian Government’s Small Business Advice and Financial Guidance Program and theVictorian Government’s Small Business Specialist Advice Pathways Program — can help thesebusinesses to access the skills they need to adopt innovations (CPA, sub. 106, p. 6).

17 Submissions to the inquiry recommended that measures be put in place to help SMEs build skills that currently stand as abarrier to adopting and using new technologies, specifically digital and management skills. The Australian Institute of Company
Directors argued for “measures to harness the untapped productivity potential of small and medium sized enterprises (SMEs)
and NFPs, including support schemes focused on management and digital skills” (AICD, sub. 44, p. 2). The Australian Small
Business and Family Enterprise Ombudsman noted that there is a digital skills gap that needs to be filled to underpin economic
growth and this is demonstrated by the continued demand for higher-level digital skills in Australia. Training should focus moreon generic transferrable skills rather than on skills with specific applications” (ASBFEO, sub. 64, p. 4).
40

Enabling innovation diffusion in Australia

Box 2.5 – Programs that may help build skills businesses need for innovation
Programs focussing on novel approaches and entrepreneurs
Services offered under AusIndustry’s Entrepreneurs Programme provide advice and funding forentrepreneurs and businesses to connect with researchers and undertake research projects (Innovation
Connections) and to bring a novel product, process or service to market (Accelerating
Commercialisation) (Business.gov 2022). The CSIRO also runs a range of programs directed towards
entrepreneurs and research teams, such as the ON programmes, which include training in customer
discovery and market validation activities, as well as an accelerator to help commercialise ideas(CSIRO 2019). State Governments across Australia also offer a variety of grant programs and fundaccelerators and start-up hubs, such as the Victorian Innovation Hub and Sydney Startup Hub, which
provide support for collaboration and staff development to help start-ups grow (Department of Jobs,
Precincts and Regions and DJPR 2018; Investment NSW 2022).

Some government programs directly target the skills and management capabilities needed for innovation.
Like most existing business innovation policies, these programs tend to target businesses engaging in highly
novel, new-to-market innovation. Some offer support to connect businesses with research institutions andcommercialise novel products and technologies. Evaluations and feedback from inquiry participants suggestthat some of these programs, such as the Enterprise Connect program (2008–2014) have had a positiveeffect on firm performance (Bruno 2020, pp. 12–16). However, their wider impact is likely limited by a lack ofprogram consistency over time. The relatively small number of businesses assisted (relative to the R&D Tax
Incentive, for example) (DIIS 2019b, p. 44) and the focus on highly novel innovators may mean that skills
imparted are not as relevant or easy to diffuse to other businesses.
Existing workers can also develop management capabilities and other skills relevant for improving diffusion
through the broader education and training system, which includes both formal learning resulting in aqualification and other options such as unaccredited short courses. As discussed in this inquiry’s companion
volume From learning to growth, formal learning options are more commonly undertaken by younger people(including students before they enter the workforce), and government investment tends to focus on the initialpost-school, pre-employment period, rather than ongoing training throughout a worker’s lifetime. That volume
includes a recommendation that the government could encourage uptake of lifelong learning options bytrialling targeted policies for work-related upskilling and reskilling, and extending self-education tax
deductions to education that is likely to lead to income outside of current employment. Existing programs
designed to support lifelong learning, such as Employability Skills Training and the incoming Skills andTraining Boost, should also be evaluated for their effectiveness at facilitating additional training.

2.4

Collaboration and networks can catalyse innovation
diffusion

The diffusion of innovation requires channels for collaboration and networks for knowledge transfer. Suchlinkages are critical to allow information about innovations to spread — to diffuse — among businesses.
These include:• within business and business-to-business linkages, such as information flows through supply chains (seesection 2.2 for examples relating to international trade)41

5-year Productivity Inquiry: Innovation for the 98% Inquiry report• business-to-business linkages via an intermediary, such as industry associations and consultants• research institutions-to-business linkages, such as with universities.

Channels for information and innovation diffusion
Information is critical to the uptake of innovation. Businesses need to know what technologies and practices
exist in the market place, their compatibility with the business’ organisation and how to adapt and integratethem into their organisation (Hall 2004, p. 19). Sources of information include research organisations(universities and public research institutions); firms in the same or related industries (including foreign firms);
and industry organisations and networks. However, not all sources of information will be perceived as equalby firms, with some sources likely to be considered both more trustworthy and relevant to a business’situation (Nooteboom 1994, p. 343).

The business community is the most important channel for diffusing
information about innovations
Firms responding to the ABS Business Characteristics Survey (figure 2.9) indicated that they derive ideas
and information about innovation from a wide range of sources. Interestingly, Australian businesses source
most of their ideas for innovation from within their own organisation. Although some of this comes fromin-house R&D and on-the-job ingenuity, a large part of this comes about from workers moving between firms
and bringing diverse skills and knowledge from their previous workplaces with them. In its 2017 Innovation
Benchmark Report, PwC noted that, of the 1222 firms they interviewed, over two thirds agreed that:bringing in employees with fresh thinking and establishing innovative behaviours and cultures are
the most critical success factors for innovation, well above other criteria, such as increasing theinnovation budget or establishing a clear business model for innovation. (Eriksson 2017)
Businesses also learn about innovative ideas and processes from their clients, their competitors and fromtheir suppliers (figure 2.9). Direct interactions with suppliers and clients can be a trusted source of
information, particularly where there are strong existing business relationships. Large, efficient firms (such as
multinational corporations) even have incentives to actively transfer information up and down their supply
chain (section 2.2). Equally, competitors’ experience with adopting and using new technologies can be an
important source of information about innovation (Stoneman and Diederen 1994, p. 924), when that
information can be shared or observed.
Seeing how technologies have performed in other businesses can reduce uncertainty about the potential
costs and benefits from adoption, reduce the need for costly experimentation, and play a role in socialisingmore complex organisational and technological innovations. For example, contactless payment systems
have diffused rapidly through the Australian economy because they provide immediate and clear benefits forbusinesses (AMTA, sub. 163, p. 9), so much so that, although contactless payment technology was invented
in the United States, Australian adoption rates of contactless payments by 2016 were 20 times higher than in
the United States (NSW PC 2022, p. 47). This is particularly relevant for time and resource-poor small
businesses. Participants in consultations for this report emphasised the importance of visibility for successful
innovations. The higher uptake of more common foundational technologies, like cloud technology, is partially
due to their increased visibility to Australian businesses compared with niche technologies, such as 3D
printing (PC 2022a, pp. 10–11).

42

Enabling innovation diffusion in Australia

Figure 2.9 – Innovative ideas mostly come from within businesses or from clients andcustomers
Sources of ideas or information for innovation, innovation-activea businesses, 2019–2021
Within this business or owned by the same company
Clients, customers or buyers
Suppliers
Competitors or businesses from the same industry
Other websites
Consultants
Industry associations
Professional conferences, seminars, etc
Government agencies
Universities or other higher education institutions
Journals, research papers and publications
Academic conferences
Other
Commercial laboratories or R&D enterprises
Other sources
Private non-profit research institutions

0

10

20
30
40
50
Share of businesses (%)

60

70

a. Innovation-active firms are firms that reported one or more innovations, or firms with abandoned or ongoing innovation
activities related to product or process innovations.
Source: ABS (Characteristics of Australian Business, 2020-21 financial year, Cat. No. 8158.0).

Many of these information flows will occur without government intervention. In some industries, spillovers
among competitors may be actively promoted, as in agriculture where on-farm demonstrations and farmer
networks actively encourage learning from early adopters. This will also be the case in creative industries
where mutual support is actively encouraged, such as in the interactive games and entertainment sector:[the] sector is a very sharing sector — our members are very happy to talk about and share theirexperiences with other companies. (IGEA, pers. comm., 7 June 2022)
Beyond such mutual support, business associations can facilitate formal collaboration such as joint ventures.
Collaboration between firms has been found to improve firms’ capacity to innovate (De Propris 2002, p. 350)by connecting businesses with the know-how, capabilities and resources they need to adopt, adapt andsuccessfully integrate innovations into their operations. For example, collaboration has been found toincrease the probability that Australian firms will innovate (Soriano and Abello 2015, pp. 349–352) andintroduce innovations that are new-to-the-market (Majeed and Breunig 2021, p. 13).
Collaborating also helps to establish networks between businesses, both formal and informal, that facilitate
the flow of information and knowledge throughout the Australian economy and from overseas. Collaborations
often arise spontaneously, as firms see the mutual benefit of engaging each other. For example, ‘young andsmall Australian companies who may not have a strong business focus can develop project management
skills via collaborations with overseas companies’ (IGEA, pers. comm., 7 June 2022). However, thesecollaborations can also be facilitated by public initiatives (such as challenges, contests, hackathons),
incubators and accelerators, or publicly funded mechanisms like the Cooperative Research Centres.

435-year Productivity Inquiry: Innovation for the 98% Inquiry report

Intermediary organisations play an important role in realising spillovers andconnecting businesses
Intermediary organisations can play an important role in helping businesses build capacity for innovation
adoption. These can include consultants and business advisers, industry associations or platforms for third
party information accessible via web resources. These intermediaries can facilitate early stage innovative
development and transformation and can also help firms with commercialisation and diffusion later in theinnovation process (Bergek 2020, pp. 379–382).
Businesses rely on different intermediaries depending on firm-specific characteristics, such as firm size. For
example, larger firms are more likely than small or medium firms to ‘outsource’ identifying valuable ideas byusing consultants (figure 2.10). Smaller firms, on the other hand, are more likely to rely on their own researchusing open-knowledge sources (websites, journals, research papers or publications) than large firms.
Access to these open-knowledge sources can be challenging for some businesses (and for intermediaries
providing advice to businesses such as industry associations, discussed below). For example, many
academic journals, research papers and publications are locked behind paywalls that can be expensive toaccess for businesses and individuals that do not have a subscription, even though the research has often
been funded by taxpayers. Restricted access can limit the reach of this research and its use not only forcommercialising novel innovations in areas such as medicine and climate technology, but also fordisseminating existing innovative practices to small businesses and individuals (Foley 2021). The impacts
are felt not only by the business community, but also by government departments developing policy in areas
such as education, health and climate change (chapter 3), as the latest evidence on effective practice inthese areas is often published in locked research journals.

Figure 2.10 – Larger firms are more likely to ‘outsource’ innovation, while smaller firms
rely more on open sources of information
Sources of ideas or information for innovation, innovation-activea businesses, 2019–21

14.4

Consultants

22.5
32.5
13.0

Industry associations

19.3
26
15.6
16.7

Other websites
6.2
0

5

0-19 persons

10

15
20
Share of businesses (%)

20–199 persons

25

30

35

200 or more persons

a. Innovation-active firms are firms that reported one or more innovations, or firms with abandoned or ongoing innovation
activities related to product or process innovations.
Source: ABS (Characteristics of Australian Business, 2020-21 financial year, Cat. No. 8158.0).
44

Enabling innovation diffusion in Australia

Opening up access to this research could therefore have significant benefits for diffusion and productivity
growth. There are alternative models for diffusion of academic research that avoid user charges, including
author pays or requirements that publicly-funded research be freely available through open-source
arrangements (as is the case for much medical research in the United States). The Productivity
Commission’s inquiry into intellectual property sets out a model for this reform (PC 2016a). The AustralianAcademy of Science noted that the United States has already moved to make all federally funded research
publicly accessible by 2025 (AAS, sub. 200, p. 2).
In this context, the Chief Scientist has recently proposed an open access model for research distribution inAustralia, which would apply to both existing and future government-funded work (Brookes 2022).18 The
model allows publishers to continue to be paid for their functional roles such as managing peer review andediting processes, but would be required to make research freely available online for all Australians, withnational agreements covering both the functional publishing costs and nation-wide read access. The
government should consider the benefits and costs of this proposed model and other potential approaches inworking towards open access to currently-locked research.
Consultants and other business advisers also communicate information about innovations to stakeholders
and can help to build absorptive capacity within organisations. For example, accountants can leverage their
existing trusted relationships with time-poor businesses (especially small business) to help improve theirtechnology and practices. Recognising this important role, Chartered Accountants Australia and New
Zealand has a CA Catalyst program that trains accountants to provide advice to their clients on a range ofissues such as digitisation (including cyber security and data analytics) and sustainability (CAANZ 2021), sothat these trusted business advisers can be a mechanism for technology and innovation diffusion. COSBOA
stressed that improving innovation adoption requires people to get advice from trusted advisers andorganisations, noting that ‘good adopters [have] good support and connections in the community, good
advisers, and are connected to their organisations’ (COSBOA, pers. comm., 9 June 2022).
Industry associations also play a very important role. Associations can share technical information with theirmembers. They can host professional conferences, seminars, meetings and trade shows, which are effective atcreating networks and facilitating the flow of information between businesses. As the Australian Retailers
Association put it when discussing the importance of visibility of new innovations, ‘if you don’t see it, you can’t
be inspired by it and want to buy it’ (ARA, pers. comm., 6 June 2022). The Interactive Games & Entertainment
Association similarly told the Productivity Commission another way they help build awareness of innovation isby running the ‘Australian Game Developer Awards’, which highlights innovation and excellence in a range ofareas including engineering, art and sound design (IGEA, pers. comm., 7 June 2022).
More generally, industry associations can facilitate connections among firms, including leading and laggard
firms; young and established firms. Associations can also connect firms to government agencies andsupport. For example, among its other services, IGEA facilitates connections between firms by performing an
introductory role between its members by hosting formal and informal events (IGEA, pers. comm., 7 June2022). IGEA suggested that some new collaborations and publishing deals came about because social
events brought firms to together. The Restaurant and Catering Association indicated that they work withplatforms (such as Uber Eats) and technology companies to make adoption easier, providing information toplatforms to better help them provide a service to firms in their industry (R&CA, pers. comm., 9 June 2022).

18 It should be noted that opening access to Australian-funded research would also increase Australian businesses’ andgovernment departments’ exposure to a larger body of international research on a topic, as the freely available articles
would have extensive references to other research. However, these businesses and departments would still not havefree access to the underlying international research under such an access model.
455-year Productivity Inquiry: Innovation for the 98% Inquiry report

Governments’ role is limited, but can provide indirect support
Supporting connections with intermediaries
Government has a limited direct role to play as intermediary between businesses. As noted by Nooteboom(1994, p. 343), while government does not usually have a vested interest in a particular innovation — and assuch, is regarded as a trustworthy source of information by businesses — government may not be seen ascompetent to judge the applicability of a given technology or practice for a firm. Moreover, inquiry
participants suggested that information that is critical for diffusion — such as on digitalisation and cybersecurity — is provided by government agencies but can be overly technical and reliant on jargon, limiting its
usefulness for small businesses in particular. Intermediaries may help to ‘translate’ government information.
Nonetheless, government can indirectly support with initiatives that create or invest in industry-connectedintermediaries. This may be particularly relevant for diffusing newer technologies and processes that areuntested in Australia or in a given industry, where a lack of information about how they perform under local
circumstances, or the adaptations needed to suit the local market, may be a barrier adoption and use. While
early adopters — both leaders and naïve leaders — are an important source of information for other firms
about the performance of novel innovations, they can incur significant costs in adopting and trialling newtechnologies. The incentives for secrecy that this creates can mean that other potential adopters must incur
the same costs to evaluate and trial the technology, delaying wider adoption. Indeed, several industry
associations told the Productivity Commission that more coordinated testing and evaluation of newtechnologies might enhance diffusion by reducing uncertainty and enhancing spillovers of information that is
critical to good decision making about adoption.
It is difficult to make a case that firms who incur the costs of researching, importing, adapting and trialling a
new technology should share their experiences with other firms, as this would presumably reduce the payoffand their incentive to innovate in the first place. But if those initial costs are shared — with relevant industry
associations, government or other non-commercial entities — then making that information available to otherfirms could enhance diffusion.
An example of government playing this role is by funding the establishment of Industry Growth Centres(box 2.6). The Growth Centres are positioned as a link between research, industry, government, and global
markets, and while their remit does not explicitly include a role in diffusion, some Growth Centres undertake
activities in support of innovation diffusion — for example, the Advanced Manufacturing Growth Centre has
explicit principles involving researching, demonstrating and promoting awareness of best practices inadvanced manufacturing (AMGC 2021). The Growth Centres’ established networks and links between
research and industry may be better utilised to upskill and diffuse innovation to and between existing
businesses, particularly from overseas, rather than focusing on trying to commercialise and scale
new-to-the-world innovation.
The future of the Growth Centres is uncertain. The original intention was for the Centres to become financiallyself-sustaining, but they vary in the strength of their financial positions (Riley 2022). The 2020 evaluation of theinitiative observed that some Growth Centres have successfully accessed funding from the private sector andother government programs (such as research funds), but ultimately noted that ‘it is unlikely the [GrowthCentres] will become self-sustaining. It may be possible that a public/private funding model will provide atransitional platform’ (ACIL Allen 2020, pp. vii, ix).

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Enabling innovation diffusion in Australia

Box 2.6 – Industry Growth Centres
The Industry Growth Centres were established in 2015-16 to support competitiveness in sectors
considered to be of competitive strength and strategic prioritya: advanced manufacturing, known as theAdvanced Manufacturing Growth Centre (AMGC); cyber security, known as AustCyber; food andagribusiness, known as Food Innovation Australia Ltd (FIAL); medical technologies and pharmaceuticals,
known as MTPConnect; mining equipment, technology and services, known METS Ignited; and oil, gas
and energy resources, known as National Energy Resources Australia (NERA) (DIIS 2019a).
Each Growth Centre was tasked with four key priorities: increasing collaboration and commercialisation,enhancing management and workforce skills, improving access to international markets andopportunities, and identifying opportunities for regulatory reform (DIIS 2019a). The Centres wereintended to focus on areas where industry organisations were yet to develop, as well as to more closely
engage with the research sector (Nous Group 2019, p. 7).
An assessment by Nous Group in 2019 suggested each Centre was generally meeting its objectives andbusiness plan. Of their four priorities, the centres were found to have focused the most on increasingcollaboration and commercialisation of research (Nous Group 2019, p. 6). An evaluation by ACIL Allen in2020 found that the Centres have supported Australian industries to become more competitive, and thatan industry-led approach is a sound way to deliver long-term value (ACIL Allen 2020, p. vi).
a. Labor proposed a seventh Growth Centre focused on the battery production supply chain during the 2022 election
campaign (Riley 2022).

To the extent that Growth Centres continue to operate broadly similarly in the future — by facilitating connections
between industry, government, researchers and markets — governments could partner with these networks toreach a wider business audience in specific industries when they implement other programs to support diffusion.
For example, programs that build management and other capabilities, and extension services for small
businesses (section 2.3), could be marketed or launched through these networks to promote awareness anduptake. These partnership efforts could also extend to governments working with other intermediaries — such asindustry associations (discussed above) — which would improve their ability to reach businesses in industries thatare not currently supported by a Growth Centre, including a range of service industries.

Facilitating knowledge transfer with extension services
Governments can also facilitate the transfer of technical or industry-specific knowledge on the existence andproper implementation of new technologies, similar to the extension services offered in the agricultural
sector.19 Extension services have been used mainly in agriculture as a way of transferring knowledge andinnovations — often developed through publicly funded R&D — to farmers for their practical use.
There is a significant body of evidence suggesting that agricultural extension generates significant positivesocial returns. For example, based on a meta-analysis of 289 studies on the returns to agricultural R&D andextension in the post-war period, Alston et al. (2000, p. 201) found an overall median rate of return toextension of 63%. In a study focused on the Australian broadacre industry, Sheng et al. (2011, pp. 28, 31)
estimated that past public investments in extension generated an average rate of return that could be as high19 This was also proposed by Professor Christopher O’Donnell (sub. 40, p. 12).

47

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportas 47% a year — contributing about 0.27 percentage points to annual total factor productivity growth in the
broadacre industry.
The key policy question is whether variations on this model could work in industries other than agriculture.
As noted in chapter 1 of this report, different sectors of the economy innovate in different ways, with
implications for the shape of the innovation ecosystem in each case. For example, agriculture is traditionallycharacterised by significant industry-specific R&D (performed centrally and funded by industry levies or
public subsidies), with a fairly stable population of farm businesses who are often not competing with one
another on price, quality or volume. In other industries, businesses’ needs tend to be more differentiated andthere can be more secrecy and competition about innovation.
Outside agriculture, extension services have had more mixed results. For example, the Manufacturing
Extension Partnership (MEP) in the United States, which provides extension services to manufacturingSMEs, was not without problems. Econometric evidence indicated that the program has had positive andsignificant effects on labour productivity and rates of firm survival, particularly for small firms (Lipscomb et
al. 2018, p. 41). However, despite the original intent for the program to become self-financing after a six-year
period of government support, the program has not managed to become self-sustaining, and continued
support for the program in the United States has been contentious (Sargent 2019, pp. 3–4).
Moreover, the specific design of the program is crucial to ensure that the services provided match the needsof businesses. For example, the original design of the MEP, which targeted the transfer of federally funded
technologies to SMEs, was found to be misguided — manufacturing SMEs did not need advanced
technologies. Rather, their needs were more basic, including off-the-shelf technology and more generalmanagement advice (Sargent 2019, p. 4).
Extension services have had more limited applications outside of manufacturing and agriculture. However,some of the practices of industry associations may be considered as examples of extension-like services.
For example, the Restaurant and Catering Association told the Productivity Commission that, among otherservices, they help the businesses that reach out to them to identify challenges and solve problems,
including translating and providing information about innovations already available in the market (R&CA,
pers. comm., 9 June 2022). More broadly, there are some not-for-profit organisations that provide
extension-like services to businesses (sometimes for a fee) as part of their business mentoring programs,
including specifically for small businesses (SBMS nd).
Despite the mixed results of extension services outside agriculture, given their success in agriculture, somevariation on this theme is worth considering to better enable the diffusion of innovations and avoid the worst
aspects of other forms of industry policy. The government should fund a trial of extension services in several
other sectors, tailoring the approach depending on what services are relevant for most small businesses inthat sector (for example, guidance on adopting commonly available technologies and innovations that are
widely available in the market, rather than advanced technologies that may not be useful for manybusinesses). Early engagement with businesses in the sector will be important to identify the types ofservices that would be most beneficial.

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Enabling innovation diffusion in Australia

Recommendation 5.3
Improving collaborative networks and knowledge transfer
Governments could strengthen collaborative networks for diffusion and facilitate knowledge transfer through:• trialling government-funded extension services, which have so far been focused on the agricultureindustry in Australia, to support diffusion of technical knowledge and relevant technologies in othersectors. The initiative should be tailored by sector depending on what services are relevant for mostsmall businesses in that sector, with early engagement between government and businesses to identify
the types of services that would be most beneficial• requiring open access for government funded research in journals, papers and publications that iscurrently locked behind paywalls. In implementing this change, the government should compare thebenefits and costs of the Chief Scientist’s proposed open access model with the benefits and costs ofother potential approaches• partnering with intermediaries — such as industry associations and other advisory or network bodies —that have existing connections between industry, government, researchers and markets when
implementing programs to support diffusion (such as capability development initiatives and extension
services). This would enable governments to reach a wider audience with their diffusion initiatives.

University-industry collaboration
University-industry connections are largely utilised for transferring and commercialising novel innovation.
However, linkages with universities can also build absorptive capacity across firms and spread knowledge
and skills within and across industries — making the potential for diffusion of innovation higher across the
economy. These connections can include:
•
•
•
•
•

joint R&D conducted between businesses and research institutions, like universities (including industry PhDs)
patent licensing
the hiring of researchers with graduate training or PhDs who have strong links to universities
input into course content, for example by professional bodies
consulting by academics.

There is a widely held view that Australian business collaboration with universities is poor.20 Data from the
ABS show that, among all innovating firms, collaboration with universities is highest among small businesses(5–19 employees), though levels of collaboration are relatively low overall (figure 2.11). Similarly, figure 2.9
shows that universities play a very minor role as a source of information and ideas about innovation, relative
to other channels of information.

20 This view appears to be largely informed by data drawn from the OECD Innovation Indicators database, a compendium ofstatistics about the innovation activities and outcomes of firms across OECD member countries (OECD 2022b). However,caution is needed in using these indicators because: i) Australia’s reference period is one year (e.g. the ABS BusinessCharacteristics Survey 2018-19 in the most recent update) whereas, for the other countries in the survey, the reference period
is two or three years; ii) the data for Australia only covers firms with 10+ employees, and only covers a subset of industries, tobe consistent with the Eurostat Community Innovation Survey (CIS-2018) (see notes in OECD 2022b).
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5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Figure 2.11 – Small firms collaborate with universities relatively more than larger firmsa
Collaboration for innovation with Australian universities or other higher education
institutions, 2019–21
12
10.2

Share of businesses (%)

10
8.1
8

6.6
6
6

4

2

0
0–4 persons

5–19 persons

20–199 persons

200 or more persons

a. As a share of innovation-active firms
Source: ABS (Characteristics of Australian Business, 2020-21 financial year, Cat. no. 8158.0).

Strengthening industry connections with universities should look beyond directcommercialisation
Low levels of engagement between firms and universities may reflect the relatively less common,
new-to-the-world research and innovation that is typically done in collaboration with universities (and withother government and private not-for-profit research institutions).
However, it may also reflect a narrow view of the ways that firms can leverage university expertise and research— one that treats university knowledge transfer as synonymous with research commercialisation. For example,
the recent University Research Commercialisation Action Plan (the Action Plan) (DESE 2022d) highlighted somebarriers to university knowledge transfer. However, measures introduced in the Action Plan are designed toincrease university research commercialisation by addressing (primarily) university and researcher disincentives
and barriers to university-industry collaboration, focused on advanced manufacturing.
In fact, the channels for knowledge transfer are considerably broader, including not just commercialisation
activities, such as IP licensing and academic spin-offs, but also knowledge transfer through labour mobility andconsulting, as well as spillovers from conferences and networking (OECD 2019b, p. 32).The importance of thesechannels can differ across fields of research, types of institutions and sectors, as certain kinds of research andtypes of knowledge are better suited to specific transfer activities (Hughes et al. 2021, pp. 25–36). Moreover,being overly focussed on measures that only capture a single channel of knowledge transfer may miss othertypes of knowledge transfer and can fail to support the relative strengths of different institutions. For example,
regional and technical universities report valuing their ongoing relationships with firms and industries as a pathway
for students, joint research and collaboration over more traditional commercialisation activities.
There is considerable scope to strengthen connections between businesses and universities. As discussed
in section 2.3, clearer pathways into industry for early-career researchers holds considerable potential. But
mid- and late-career academics could also be a valuable channel for the diffusion of innovation, if
50Enabling innovation diffusion in Australia

appropriate linkages between industry and them can be created. One possible channel is academic
consulting with private industry (and government), although complex approval processes and procedures
may reduce the incentives for academics to seek out opportunities for consulting (box 2.7).

Box 2.7 – Barriers to academic consulting
Academic consulting is a channel for universities to engage with and transfer knowledge to industry andgovernments, and to transfer insights from social science research in particular (OECD 2019b, p. 62).
However, consultancy procedures and approval processes may increase transaction costs associatedwith consultancies and reduce the incentives of academics to engage in them. This may arise as a resultof a preference for consultancies to be provided through the university rather than privately byacademics.a Conducting consultancies through the university has advantages. For example, staff may becovered by the university’s professional indemnity insurance policies (for example, Monash
University 2022); be able to use their professional title and university position; and use the university’s
facilities and resources. However, the involvement of a university contracting office or legal teams maylead to time delays (Verreynne, Torres de Oliverira and Mention 2021, p. 11). Further, academics who
consult through the university may receive only a small share of the consulting fees, and may be
restricted to using their share of fees on their academic research expenses, which could also reduce
their incentives to seek out consulting opportunities.
Academics and firms may prefer to contract directly for consultancy or advisory services. Universities
generally allow academics to engage in private consulting (also referred to as paid outside work) for up to 52
days in a year or 20% of their time.b However, associated conditions and procedures — which are intended toensure that academic staff fulfil their obligations to the university and limit any risk to the university — may
reduce academics’ incentives to pursue private consultancies as a knowledge transfer channel through:• approval processes, such as requiring approval above the level of the Head of Unit. For example,
Monash University requires that paid outside work be approved by the Sub-Faculty Dean or Head of
School/Institute (MNHS), Dean or Executive Director (or delegate) (Monash University 2022)• prohibitions on using university titles or positions. For example, the University of Western Australia’s
Consultancy Policy prohibits private consultancies from making use of a University position or
professorial title (UWA 2021); the University of Queensland (UQ) prohibits academics from using theirposition or association with UQ as the basis for obtaining ‘secondary work’ (incl. independent
contracting and consulting) (University of Queensland nd)• conditions for using university resources (e.g. the requirement to obtain permission and reimburse theuniversity for using resources).
a. As an example, UQ’s Consultancy, Secondary Employment and Internal Work Policy indicates that it is the
University’s preference that any non-research work be conducted through UQ as consultancy rather than as
secondary employment (University of Queensland nd). b. The University of Melbourne specifies 13 days in a quarter,
where the dean, or Vice-Chancellor in the case of a dean, can approve an arrangement where the days areaveraged over two quarters (University of Melbourne nd). Neither the University of Queensland nor Monash
University appear to specify how much time can be used for private consulting.

Individual universities have the right to set their own approaches to academic consulting based on theiroperational needs and risk management processes. However, unnecessarily burdensome administrativerequirements create disincentives for academics to undertake consulting and reduce the potential forknowledge transfer from universities to industry and government. If universities are unable or unwilling to51

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportlower these barriers to academic consulting, the government could help to foster more activity, such as bysetting guiding principles to govern universities’ approaches to academic consulting and standardised
processes and fee requirements. This could be an area that is incorporated into the Australian Universities
Accord that the Australian Government has committed to establishing, noting that the panel currently
providing advice to the government on the Accord has been directed to examine opportunities to boost
collaboration between universities and industry in order to share new knowledge, innovation and capability.

Finding 5.5
An overly narrow focus on university research commercialisation
Recent policy initiatives to increase knowledge transfer are too narrow in their scope in that they focus on
direct commercialisation activities and advanced manufacturing industries. By focusing on researchcommercialisation, policy initiatives to increase knowledge transfer treat knowledge transfer assynonymous with commercialisation, even though other channels — such as consulting by academics —may be more relevant for certain types of firms and industries (especially service industries), researchareas (especially social sciences) and research institutions.

Finding 5.6
Administrative constraints can act as barriers to academic consulting
Although university academics are generally allowed to provide consulting services to industry andgovernment, university procedures and approval processes can reduce incentives for academics to pursue
such work. For example, requiring the involvement of a university contracting office may lead to delays. Or
requirements about how consulting revenue is distributed and obligations to limit risk to the university may also
create barriers. These disincentives create a missed opportunity for a valuable knowledge transfer channel.

Recommendation 5.4
Reducing administrative barriers to academic consulting
The Australian Government should reserve the right to facilitate more consulting by university academics,
should universities be unable or unwilling to lower unnecessary administrative barriers that disincentivise
academics from undertaking consulting. This could be incorporated into the Australian Universities
Accord, with the government setting guiding principles to govern universities’ approaches to academic
consulting and standardised processes and fee requirements.

Other opportunities to foster spillovers and information flows
Benchmarking can highlight opportunities for innovation where businesses areunder-performing relative to their peers
Perceiving a need — or equally an opportunity — to improve business performance can lead firms to seekout and adopt productivity-enhancing technologies and practices. Yet as discussed in chapter 1, most52

Enabling innovation diffusion in Australia

Australian businesses undertake little or no assessment of their own performance, with innovation measures
receiving the least attention (figure 1.3). One explanation may be a lack of time. Managers who are time andresource poor may not have the capacity to assess the performance of their business. As noted by theAustralian Institute of Company Directors (AICD):
Feedback from AICD members, for instance during consultation on cyber reforms, is consistentthat due to resourcing and time constraints many SMEs and NFPs struggle adapting to digitaltechnology changes and building management capability. (AICD, sub. 44, p. 9)
However, a lack of information and effective performance measurement tools may also be a factor.
Benchmarking tools can help businesses to identify areas of under-performance by allowing them tocompare their performance with similar businesses across a set of relevant performance indicators.
A range of business benchmarking initiatives exist in Australia, offered by government agencies, as well as
for-profit businesses or industry bodies to benefit their customers and members (box 2.8). In general,
government-provided services have not been developed primarily for the purpose of providing benchmarking
tools for businesses. Rather, they have been developed either to provide value back to businesses that
supply data required by that government agency (for example, where businesses respond to surveys
conducted by the ABS and the Australian Bureau of Agricultural and Resource Economics and Sciences(ABARES)), or as a complement to other activities undertaken by the agency (for example, benchmarks
developed by the ATO for monitoring compliance can also be used by businesses to assess theirperformance). While some consideration has been given about how this information can be used to provide
tailored insights back to businesses, there is currently limited analysis of the underlying drivers, actionableadvice, or connection to other services that could assist businesses.
In contrast, services developed by private providers and industry associations tend to be more directly
targeted at providing benchmarking services to businesses. The services differ in the detail they provide tobusinesses, and in particular, the degree to which the information is tailored and actionable for an individual
business, with private services tending to offer the most tailored and actionable advice (for a fee).

Box 2.8 – Existing benchmarking initiatives
The Australian Government provides several benchmarking initiatives. These include:• small business industry benchmarks published online by the ATO (2022), which provide ranges forgeneral performance indicators based on tax return data, tailored to an extensive range of highly
disaggregated industries (although not tailored to individual businesses that access the service)• an initiative currently being developed by the ABS, which will provide tailored benchmarking reports tosmall-to-medium businesses when they participate in relevant ABS surveys and report their data through a
new streamlined reporting application linked to their existing accounting software (ABS 2022a)• some government agencies that may also provide data at a sufficient level of granularity to enablebenchmarking — for example, ABARES provides a variety of agricultural indicators by farm size andtype through its Farm Data Portal that can be used by farmers to benchmark their performance(ABARES 2022).
In addition, several for-profit providers offer benchmarking services to Australian businesses(Benchmarking.com.au 2021; FMRC nd; GE Digital 2022) and some industry bodies also offer similar
services for their members — for instance:53

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportBox 2.8 – Existing benchmarking initiatives• Dairy Australia has developed the Dairy Farm Monitor Project, which provides comparative data todairy farmers through an online portal (Dairy Australia 2022)• the Innovative Manufacturing Cooperative Research Centre created the benchmarking and diagnostic
tool ‘futuremap’ for small and medium enterprises in the manufacturing industry to map theircapabilities in 13 areas of industrial competitiveness, including market positioning, leadership anddigitalisation (Ai Group, sub. 179, p. 17). The tool provides a self assessment and then identifies
tailored opportunities for immediate and medium-term growth opportunities• Business Excellence Australia has created the Australian Business Excellence Framework that
‘focuses on an organisation’s ability to sustain innovation and provides organisations with guidance on
establishing innovation systems’ (BEA, sub. 159., p. 5), which could be used as a framework for
performance benchmarking.

How can benchmarking initiatives better support innovation diffusion?
There are three key considerations for developing effective benchmarking tools that encourage innovation
diffusion — obtaining access to data, encouraging businesses to use the tools that are developed, andensuring the tools offer meaningful insights and assistance that promote innovation.
Regarding access to data, improving data sharing arrangements across agencies and increasing thecollection of data from government funded entities (for more detail see PC 2022a, p. 43) could increase theusefulness of data for benchmarking purposes. However, this would need to be balanced against the needfor data security and maintaining confidentiality for individual businesses. The inquiry’s companion volume
Australia’s data and digital dividend notes that the ABS and ATO are continuing to explore how they canprovide data collected from businesses back to businesses, safely and securely, in order to add value (suchas for performance comparison purposes via tailored reports). Other government agencies may also collectand hold data from businesses and consumers that could be aggregated and/or analysed and then provided
back to businesses and consumers for benchmarking purposes, including in specific sectors such as
ABARES is already doing for farm performance benchmarking (box 2.8). Further sector-specific opportunities
for data sharing for benchmarking purposes could include APRA and ASIC data for financial services and
ACCC data for various consumer products.
Benchmarking examples from the United Kingdom, Canada, and New Zealand demonstrate the potential to
make benchmarking tools directly accessible online, including the ability to tailor the results based on somebasic inputs provided by a business.21 Efforts by Australian government agencies to provide data back tobusinesses for benchmarking purposes could be extended by creating similar accessible and tailored tools.
The ABS initiative also highlights how existing points of contact between government and businesses can beleveraged to offer benchmarking tools with benefits for both parties. In this case, businesses are offered
access to benchmarking, which also acts as an incentive for them to engage with government in other ways
(in the ABS example, benchmarking reports will be provided as a direct benefit to businesses that use the
new streamlined reporting application).

21 For example, the UK Office for National Statistics’ online labour productivity calculator and benchmarking tool (Officefor National Statistics 2022); the Business Development Bank of Canada’s productivity benchmarking tool (Office for
National Statistics 2022); Stats NZ’s business performance benchmarker (Stats NZ 2022).
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Enabling innovation diffusion in Australia

The tools that are developed should offer meaningful insights and assistance to the businesses that access them,and specifically promote innovation. The Australian Academy of Technological Sciences and Engineering has
noted that traditional indicators of innovation have become ‘increasingly insufficient and misleading’ (ATSE,
sub. 98, pp. 2–3). The effectiveness of the tools may be improved by accompanying the benchmarking resultswith other analysis — for example, accessible and relevant case studies about how similar businesses havesucceeded in adopting new technologies and processes could assist innovation-ready businesses that are unsureof where to begin with improving their own operations (Ai Group, sub. 179, pp. 16–17). Advice that highlights thepossible underlying drivers of the benchmarking results and provides relevant actions for businesses could also
help, and benchmarking services could link to other government programs and support for businesses.
One question, however, is whether businesses would recognise government as a competent provider ofsuch advice (Nooteboom 1994, p. 343). This may suggest a need to involve third parties with more directindustry expertise, such as industry associations or business advisers. For example, the Ai Group noted that‘the development of case study material could also be an area for partnership with industry associations who
are more familiar with the target market and less likely to be restrained by political considerations andobjectives than government agencies’ (Ai Group, sub. 179, p. 17).

Recommendation 5.5
Using government-held data for benchmarking purposes
Government agencies should use data they collect to help businesses benchmark their performance andprovide insights that promote diffusion of best practice.
• Existing efforts to provide data collected from businesses back to businesses for performancecomparison purposes, such as those by the ABS, ATO and ABARES, should be extended — forexample, by making benchmarking tools with tailored results accessible online, or by accompanying
benchmarking results with other analysis such as case studies on best practice.
• Other opportunities to use government-held data for benchmarking should be explored, including inspecific sectors where applicable (for example, APRA and ASIC data for financial services and ACCC
data for various consumer products).

Firms learn from their neighbours, but place-based programs are unlikely toyield a large diffusion dividend
A recent trend in innovation policy in Australian is an increased focus on place-based programs (ISA 2016,p. 82). Place-based innovation programs — measures to develop or enhance existing accelerators,
incubators, clusters and technology parks and precincts (ISA 2016, p. 82) — can create additional
opportunities for spillovers between participating firms — often firms operating at or close to thetechnological frontier. For example, proximity of research institutions to each other can create ecosystems
where horizontal spillovers in the form of knowledge, skills and shared infrastructure can attract further
investment and improve the diffusion of innovation.
Various Australian governments are already investing in co-location, for example in the Melbourne
Biomedical Precinct (Invest Victoria 2022) and Sydney’s Tech Central, which aims to stimulate technology
uptake (NSW PC 2022, pp. 58–59). Indeed, placed-based programs are one of the key mechanisms forState and Territory Governments to facilitate information flows in the innovation system and encourage

55

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportspillovers (ISA 2016, pp. 23–24).22 Place-based policies also play a role in regional development policy(PC 2017e, pp. 70–71).
For firms, the two key benefits of clustering are spillovers from job transitions and knowledge sharing. Job
transitions within local clusters create a channel for diffusion, with employees carrying knowledge with themas they move between firms (Krugman 1991). Clustering may also promote collaboration and informal
knowledge sharing, particularly when local firms are technologically close (Matray 2021, p. 396).
While there is empirical evidence of knowledge spillovers between co-located firms (for example,
Matray 2021, pp. 405–409), empirical evidence on the effectiveness of cluster policies is less decisive. One
meta-analysis of studies on accelerators and incubators found positive impacts on employment and accessto finance (Madaleno et al. 2022, p. 290). Australian studies have found that clustering had a positive andsignificant effect on R&D expenditure amongst clustered firms, driven largely by increased competition(Bakhtiari and Breunig 2018). However, other scholars suggest the evidence is ambiguous (Bloom, Van
Reenen and Williams 2019, p. 178).
Given that spillovers from place-based programs are localised to participating firms, declining rapidly with
distance (Matray 2021, p. 403), and highly novel innovators are only a small fraction of Australian firms, thesepolicies on their own may not yield a significant and wide-reaching diffusion dividend. Additional mechanisms
may be required to expand the reach of information and expertise developed in a cluster. For example,
collaboration with industry associations could facilitate broader knowledge transfer, as discussed above.

Finding 5.7
Policies to promote clusters have a limited impact on broader knowledge transfer
Clustering may promote innovation diffusion amongst participating firms through job transitions andknowledge sharing. But given that spillovers from co-location are highly localised, and most place-based
programs focus on highly novel innovators, place-based innovation policies are unlikely to yield asignificant and wide-reaching diffusion dividend.

22 See DIIS (2018) for a list of place-based programs around Australia.

56

Innovation and diffusion in government services

3.

Innovation and diffusion ingovernment services

Key points
Given governments’ spending of about $880 billion — or more than 42% of GDP — even small gains
from innovation and adoption can realise either better services or cost savings of billions.
Innovative approaches in service delivery, policy and system design are evident throughout the public
sector, and extend to regulation, tax and funding settings that also produce benefits for the private sector.
• But innovation is often slow, piecemeal, disorganised, and inconsistent across jurisdictions.
• Benchmarking shows wide variations in the efficient provision of services across jurisdictions.
• This reflects unique aspects of the public sector: measures of success are contested and ambiguous;funding models create opposing and perverse incentives; norms and regulations discourage innovative
approaches; and competitive pressures and the threat of exit are absent.
Many of the approaches to achieving diffusion of new processes and approaches in government
services are well-known but underexploited.
• Improved funding and procurement models could drive better quality care in health services, and increase
the efficacy of government procurement in defence and public infrastructure. Potential improvements include
applying more evidence, rigour and transparency to public investment (including via better use of cost-benefit
analysis); and adopting longer-term, co-operative and citizen-centred approaches to funding service delivery.
• Better data collection and program evaluation for government service delivery can uncover why there aredifferences in performance and how, when not justified, these differences can be narrowed.
• Innovation could be more efficiently disseminated across government agencies and service providers bystrengthening the role of existing diffusion bodies, like the Australian Education Research Organisation or the
CSIRO, helping to eliminate practices no longer underpinned by adequate evidence.
• Government can support greater use of regulatory technology (‘regtech’) by providing regulation in forms that
lend themselves to regtech solutions (such as machine-interpretable regulation) and working with software
companies to encourage the provision of compliant regtech solutions.
• Facilitating access to existing knowledge by government-operated or funded service providers would support
the diffusion of best practice. This includes eliminating the pricing of Australian standards that have highpublic good value, and reforming fair use provisions in intellectual property.

57

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Like market goods and services, public sector innovation and its diffusion increases productivity by either
raising output per unit of input at unchanged quality (for example, through improved procurement of defence
equipment) or by improving quality and community wellbeing (such as better-quality aged care or more
effective health care technologies).23 While there are fiscal benefits for government from some forms ofinnovation and diffusion, an increase in the ‘bang for a buck’ of government spending does not necessarily
generate savings: as service quality rises, so too does demand.24
All levels of government are direct providers of non-market services or, through contractual arrangements,
the key agents for managing their provision by the private and not-for-profit sector. This includes services
provided by local government (such as libraries and waste management), State and Territory Governments(such as health care, schools and public transport, the justice system, and emergency services) and theAustralian Government (defence, higher education, and much of the tax and transfer system). As many
non-government organisations supply services on behalf of governments, innovations in the way in whichgovernments fund and regulate such organisations are particularly important.
The scale of government-funded and managed services is huge, and so the gains from even modest
innovations and their wider diffusion can be large. In 2020-21, total general gross government expenses
amounted to about $880 billion at the local, state and territory and Australian level, or about 42% of grossdomestic product (ABS 2021a, 2022b). The biggest potential savings would arise from efficiencies in thedelivery of government services to the community (whose value was $445 billion or 22% of GDP25).
This is a static picture of the role of governments. The expenditure per capita of government services will
increase over time — particularly in areas like health and aged care, which are affected by population ageing
and rising expectations about the quality of services as incomes rise (Commonwealth of Australia 2021). As
emphasised in this inquiry’s companion volume Keys to growth, just like services in general, further costpressures will reflect that wage growth in government services will be strongly affected by the necessity tomatch the wages in higher productivity sectors (Baumol’s ‘cost disease’). Wages are a key component ofgovernment-funded services like age and disability care.
Public sector innovation and its diffusion have always been important, albeit downplayed in public policy.
Notably, the Ferris performance review of Australia’s innovation, science and research systemacknowledged its importance, but it hardly figured in its policy analysis or recommendations (ISA 2016).

23 As in private businesses, innovation relies on data, research and experimentation, acquired expertise and absorption ofideas from businesses and other governments (domestic and global). However, the measurement of public sector
innovation and diffusion is much worse than for the private sector. The enumerated value of innovation — $2.3 billion spentby the Australian Government and the $1.3 billion spent by state and territory governments — solely relates to R&D, which
is at the novel end of the innovation spectrum (ABS 2022d). Yet there are many activities where resources are spent on
innovation, adoption and diffusion of the kind set out throughout this chapter that will be rarely captured by such metrics.
24 An illustration is the growth of PBS-funded intravitreal therapeutic drugs for age-related macular degeneration (AMD),Ranibizumab and Aflibercept. Both treatments are more effective than alternatives, and led to a nearly ten-fold decreasein the incidence of age-standardised blindness due to AMD (Heath Jeffery et al. 2021) — a large quality improvement.
Consequently, their use grew massively (zero scripts in 2006-07 to 530 000 in 2020-21), and notwithstanding a pricereduction of about 40% from introduction, government expenditure rose by about 14% per annum from 2007-08 to
2020-21 to a total of nearly $640 million.
25 The spending areas (before non-tax revenue) included are defence; public order and safety; environmental protection;
housing and community amenities; healthcare; recreation, culture and religion; education, and transport. The residual
expenses of government include some important services, such as R&D on general public services undertaken by
governments, but the data to isolate the costs of such residual services are not available.
58

Innovation and diffusion in government services

Yet the need for innovation and its effective diffusion will grow over the next 50 years in managing climatechange, the growing burden of chronic disease, and population ageing, among many other issues. A needfor effective innovation and its adoption and adaptation across different communities is central to theambitions of Aboriginal and Torres Strait Islander people and Australian governments to close the gap. The
greater the level of innovation and the more rapidly good ideas in any given area of government service
provision can be diffused, the more productive and effective will government be in these vital areas.

Finding 5.8
Small changes — large gains
Australian, state and territory, and local governments spend hundreds of billions of dollars each year, mostly
on government services. The scale of governments’ activities means that even the smallest of reforms — if
widely adopted — can generate large savings or improve the quality of services for millions of people.

3.1

Public sector innovation and diffusion occurs, but isvariable

Innovative approaches to government services and their delivery, policy and system design are evident
throughout government services, often in relation to service processes, but also in relation to regulation, tax
and funding settings. Many of these have previously been examined by the Productivity Commission, suchas innovative healthcare models for treating chronic conditions that have improved quality of care and led tocost reductions (PC 2021b), and alternative practices in the justice system that have achieved better
outcomes at lower costs without jeopardising community safety (PC 2021a). Rapid changes to the delivery ofsome government services during the COVID-19 pandemic also demonstrated the potential for significant
innovation. For example, while many are familiar with the expansion of MBS-funded telehealth in generalpractice associated with COVID-19, there was also rapid innovation in acute care over this period (AustralianCommission for Safety and Quality in Health Care, sub. 9, p. 5).26
But the history of government initiatives is often typified by the gradual adoption of good ideas — forexample, in 1993, Victoria adopted activity-based funding as the way to more efficiently fund public hospitals.
It took 17 years before all of the large jurisdictions followed in adopting this innovation (Duckett 2018a,
p. 355). This can contribute to variations in the performance of the basic functions of government, as
revealed by the Productivity Commission’s regular Report on Government Services (with figure 3.1 showing

26 For instance, in 7 months during 2020, the Royal Prince Alfred Virtual Hospital grew its workforce from six nurses to a

multidisciplinary service of over 50 medical, nursing and allied health teams. Patient use increased from 1000 to 7000
between May 2020 and January 2021 (Hutchings 2021). An economic evaluation suggested net savings of $13–
18 million from avoided costs associated with standard care models in less than a year of operation (Shaw and
Wilson 2021). And as another example, at the peak of the COVID-19 pandemic, Melbourne’s Royal Children’s Hospital
was delivering 70% of its specialist clinic appointments by telehealth. It provided 11 200 telehealth consultations in April
2020 (up from 231 in April 2019). Average transport cost savings were $85 per consultation per family, while costsavings in caregiver time averaged $145 (Hiscock et al. 2021). Savings were significantly higher for families in regionalor remote areas. While some types of consultations may have reduced accuracy of diagnosis or quality ofcommunication with the family, for many families and many types of specialist appointments there would be little loss ofquality, and in many cases the alternative would have been no consultation.
59

5-year Productivity Inquiry: Innovation for the 98% Inquiry reporta diverse variety of metrics). These variations may sometimes reflect different circumstances or funding
priorities, but many of them suggest that some jurisdictions are better at managing aspects of their services
than others, which offers the scope for governments to increase the diffusion and adoption of better practiceacross public sector services. Notably, variations can sometimes be small — as in patient satisfaction withambulance services — while others, like the cost of coroner’s courts, show extraordinary differences. The
variations within jurisdictions will be much greater than those shown here, so the chart will underestimate thescope for the diffusion of best practice.
Figure 3.1 – Performance in public services often vary markedly even across jurisdictionsa
Real net recurrent expenditure per
finalisation, coroner’s court, 2020-21

Proportion of public housing unoccupied Adverse events per 100 public hospital
separations, average of 2017-18 andat 30 June, average of 2018 and 20192018-19

5

8

4

6

3

6

% 4

%
2

2

1

100
60

%

NT

ACT

SA

Tas

Qld

WA

NT

Tas

ACT

SA

WA

Vic

NSW

NT

ACT

SA

Tas

WA

Vic

Qld

NSW

Closed (after exit) support periods forPatient experience of ambulances –people experiencing homelessness with share very satisfied/ satisfied, averagean individual case management plan
2017-18 and 2018-19
where all goals were achieved, average
2017-18 and 2018-19

Vic

0

0

0

NSW

3

Qld

$'000

9

Prisoner education and training % ofeligible prisoners), average 2017-18 and2018-19

80

98

60

96

40

% 40

%
94

20

92

90

a. Pre-Covid-19 values were used where measures were affected by COVID-19.
Source: Productivity Commission (various issues), Report on Government Services.

60

NT

Tas

ACT

SA

WA

Qld

Vic

0

NSW
Vic
Qld
WA
SA
Tas
ACT
NT

NT

ACT

SA

Tas

WA

Qld

Vic

NSW

0

NSW

20

Innovation and diffusion in government services

Finding 5.9
Government innovation is not an oxymoron, but governments are slow adopters of best practice
Government at all levels can be highly innovative, as illustrated by initiatives in various services such as
healthcare and the justice system, and rapid responses to the COVID-19 pandemic. In combination, these
initiatives have the potential to improve resource allocation and deliver better quality services. But
innovation and the uptake of best practice is often sluggish, patchy and inconsistent across jurisdictions.
Benchmarking of governments’ performance across multiple dimensions — such as patient experiences in
hospitals and ambulances, prisoner education, support services for people experiencing homelessness —suggests many have failed to draw on the practices of better performers.

3.2

There are major obstacles to innovation and diffusionthat need to be reformed or managed

Some obstacles are common to the public and private sector
The challenges for innovation and diffusion in the public sector share some features with the private sector.
Analogous to the business profile of Australia, which is characterised by many small firms, there are many
relatively small providers or organisations that deliver government-funded services. These include GPs,
schools, jobactive providers, aged care home support services, community centres, libraries and a host ofother services that are geographically dispersed and therefore necessarily small or medium in size.
Even large organisations like hospitals, transport authorities, aged care facilities, universities, and prisons are
spread across both urban and regional areas and have varying levels of government control and oversight.
This means that there are large potential gains from experimentation and the sharing of successes
and failures. An example of these gains being realised more widely with the diffusion of improved practices
can be seen in emergency services, with many people calling ambulances able to have their health needs
met in other ways. Early research by the Australian Institute of Health Innovation found referral of low-acuity
triple zero callers away from ambulances to alternative care arrangements lowered costs considerably withno adverse health impacts (Vecellio, Raban and Westbrook 2012). Such ambulance secondary triage care
has now been adopted in all Australian jurisdictions, with proven beneficial outcomes (Eastwood et al. 2015).
However, communication across small providers is difficult as there is often a lack of visibility or forum
for such discussions, no coordinating mechanism, and a lack of incentives to share past experiences. It canmake diffusion and scaling of innovations more difficult (Albury 2005).
This is accentuated when ownership varies across government-funded services, with, for example,
residential aged care provided by governments directly, by not-for-profit agencies and by private for-profit
businesses. While ownership can affect the incentives to diffuse innovation, their different cultures andpractices can also hinder diffusion (in the same way that cultures differ between family businesses, SMEs
and large private sector corporations).
The highly decentralised nature of many government services is only one aspect that affects the capacity for
adoption. Some government services are more akin to large (a state transport authority) or franchised
businesses (Centrelink offices). In these activities, there is the potential for speedier diffusion of innovation61

5-year Productivity Inquiry: Innovation for the 98% Inquiry reportas their governance arrangements allow the head of the agency to require the adoption of a new approach.
On the other hand, large entities have big bureaucracies, and tend to be slow-moving, hierarchical andrisk averse, which is inimical to some types of innovation and adoption.
In addition, slow diffusion may reflect the complexity of some innovations in services: as noted inchapter 1, the gradual diffusion of innovative processes can be justified by the uncertain and contingent
nature of their benefits. For example, coordinated care trials in healthcare — which aimed to get better
outcomes for patients through a coordinated package of services — commenced in the late 1990s. The
model had strong conceptual underpinnings, but results were varied. A succession of new trials of integrated
care took place over the next 25 years, most recently in the large-scale trial of Health Care Homes (HCHs)— a model of integrated care that had proved successful in achieving better clinical outcomes and patient
experiences in the United States (PC 2017b, p. 111). However, the evaluation of HCHs found that short-run
clinical outcomes were no better than those of patients not enrolled in them (Pearse et al. 2022).
In part, the lacklustre results reflected the problem of scaling up a promising approach to large populations,and possibly the short period over which clinical assessments were made:A key issue for the HCH trial was that changes practices implemented during the trial lacked
fidelity to the original aspirations for HCH as articulated by the PHCAG [Primary Health Care
Advisory Group]. That is, while some practices introduced comprehensive changes to chronic
disease management, others made few changes. Lack of change was mostly due to low levels ofpatient enrolment and/or relatively low levels of GP participation in HCH, resulting in insufficientscale to allow meaningful changes to be made. (ibid, p. 22)
Another example of difficulties scaling up effective practices can be found in mental healthcare. In 2017-18,
about 40 000 consumers in community ambulatory mental healthcare services would have benefitted fromparticipation in an Individual Placement and Support Program, yet only 4.5% of that group did so (PC 2020e,
p. 949). This was despite firmly established evidence in favour of this approach, though it may be partly
driven by the cost of treatment. The broader picture of Australia’s mental healthcare system was that
adoption of a best practice system would yield benefits of about $20 billion annually (PC 2020e, p. 2).
Outside of healthcare, scaling up successful programs can also be hindered by fragmented service
provision. For example, in a case study from the criminal justice system, the Productivity Commission foundthat the South Australian Government reduced the likelihood of offenders returning to custody from 34% to
20% through the Home Detention Integrated Services Program, which offered wraparound support for a wide
range of specific offender needs (Cale et al. 2019, p. 9; PC 2021a, p. 84). This created savings of about$54 000 per participant due to the lower cost of home detention and the reduction in return to custody(PC 2021a, p. 84). But adoption of such novel approaches is low in some other jurisdictions, reflecting thechallenges of diffusing and scaling successful programs across relatively fragmented systems.

There are also obstacles unique to public sector diffusion
While there are commonalities, there are also major differences between the public and private sector that
affect the capacity, methods and incentives for innovation and diffusion.

Objectives vary and success is hard to measure or even define
In the private sector, the ultimate goal is to maximise profits, which provides a transparent benchmark for theeffectiveness of innovation. By the nature of governments’ remit, consensus about the public good, the best
actions to promote it, the key priorities, and acceptable trade-offs varies across and within governments. In the62Innovation and diffusion in government services

public sector, the objective is to improve the public good with all the ambiguity that term entails, subject tothe constraints imposed by the sometimes-conflicting interests of politicians, bureaucrats and lobbyists.
One of the starkest examples of this is that billion dollar public infrastructure projects are more politically saleable
than a combination of less conspicuous projects (like better road maintenance), even if the latter have greater net
benefits than the former (Ergas 2014, p. 13). Another example is the political challenges associated with phasingout stamp duties on property transfers in favour of a broad-based tax on unimproved land value. While the latter iswidely acknowledged as a more efficient tax (and the Productivity Commission has previously recommended thatall state and territory governments should make this transition (PC 2017d, p. 20)27), implementing such a change
would have differential impacts on various segments of the population and economy.

Incentives are mixed
This is further complicated by the reality that a federal system of government — for all its benefits — leads to(sometimes) overlapping roles and divergent goals, which can frustrate the diffusion of innovation. A
private business could change its corporate structure in parallel circumstances, but different levels ofgovernment must negotiate — sometimes over protracted periods — to achieve reforms that improve theoverall public good.
As an illustration of the complexities of federation, some of the deficiencies of the health system stem fromthe fact that the Australian Government funds and regulates primary healthcare, while State and Territory
Governments are the managers and predominant funders of hospitals. A few exceptions aside, state- andterritory-run local hospital networks have a limited capacity to commission services eligible for MBS
payments (under section 19 of the Health Insurance Act 1973 (Cth)). The Tasmanian Government noted thatthe current funding model has inhibited innovation in integrated healthcare:
A key barrier to reform for Tasmania has been the restrictions caused by section 19(2) of the
Health Insurance Act 1973 (Cth), which prohibits payments of Medicare benefits where othergovernment funding is provided for that service. Unless there is an exemption, this requirement
restricts services that require a mix of, for example, payments to GPs under the Medical Benefits
Scheme (MBS) or to hospitals under the Activity Based Funding framework. This is a disincentive
to developing integrated models of care that would support a reorientation of care away from
hospitals and into the community. (Tasmanian Government, sub. 196, p. 11)
Moreover, while activity-based funding encourages efficiency by funding activities within hospitals, it provides
no incentives for hospitals to make investments in out-of-hospital interventions that reduce those activities(PC 2017d, p. 52). Likewise, the Australian Government only captures a share of the dividends frominvestments in primary care that reduce long-run demand for hospital services and the staff and infrastructure
underpinning those services.28 This weakens governments’ incentives for action. Even greater messinessensues from the complex role of heavily government-subsidised and regulated private health insurance.
Housing policy suffers from some similar dilemmas given a mix of shared and competing roles by all levels ofgovernment, including funding deficiencies, which suggest significant benefits from a genuinely coordinatedapproach (PC 2022b).

27 In 2012-13, the ACT Government implemented a 20-year transition to abolish inefficient stamp duties on property

sales and move to rates. In July 2022, the NSW Government followed in the ACT’s footsteps, though with the significant
variation of giving homeowners the option of choosing to pay stamp duty or higher rates.
28 In the medium run, the excess demand for hospital beds means that there are few savings as one group of patients is
replaced by others. However, over the longer run, any lasting reductions in demand for hospitals can reduce the need forthe highly costly expansion of existing hospital services (PC 2021b, pp. 30–31).
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5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Universal supply to heterogenous groups means no one-size fits all
A major challenge for many government services is that there is an obligation to supply them to disparate
and geographically dispersed populations across all of Australia. The variety of locations and theheterogeneity of customers mean that services often must be tailored to meet local circumstances. Many
National Agreements between the Australian, state and territory governments identify priority groups (suchas people with a disability or Aboriginal and Torres Strait Islander people) to recognise their specific needs.
Service delivery can be very different in regional versus urban locations, especially in thin markets. There aremany highly-specific programs aimed at closing the gap. The consequence of the variety and specificity of
citizens’ needs is that learning from one program or service delivery approach (diffusion) may not translate
well to other contexts.
Heterogeneity between jurisdictions can limit diffusion of good practices not only in the design anddelivery of government services, but also in the design and implementation of government policies andregulations. For example, notwithstanding the benefits of major re-zoning reforms in Australia’s biggest cities(PC 2017d, pp. 145–146, 2022b), progress across most jurisdictions has been slow. This is partly because
each state or territory has its own, distinct statutory planning frameworks, lexicons and professions, whichmakes knowledge sharing between jurisdictions challenging. This inquiry’s companion volume A competitive,
dynamic and sustainable future includes recommendations on how State and Territory Governments could
further improve planning and zoning regulation, including by standardising business and industrial zones
across local government areas and reducing the number of zones (where possible) while broadening therange of permissible activities.

Local monopolies abound and cannot go broke
Many government-owned or funded services face little or no competition from rivals given they are themonopoly provider or meet the needs of different regions. For example, many state schools have restrictive
arrangements for out-of-area enrolments, which limits parental choice to a local school. And unlike private(and even not-for-profit) businesses, there are relatively few exits and entries by government-owned service
providers, nor much risk of them. This reduces the pressure for innovation and adoption of best practice. In
some public services, there is no permitted competition (generally for good reasons) — as in policing,prisons, and the Australian Tax Office.

Norms and regulations discourage innovation
Government services are often subject to higher levels of prescriptive regulation and have risk-averse norms(ANZSOG 2019). These may be justified for safety, ethical or other reasons, but high levels of regulation and risk
aversion can limit the scope to change deficient prescribed practices, require resources to meet regulatory
reporting requirements and can reduce the capacity of lower managers to autonomously make changes.
Regulations eat time, and time is a scarce input into innovation and adoption. For example, teachers facehigh levels of administrative work reportedly due to government and school level bureaucracy, making up 8%
of a ‘typical’ working week (Hunter, Sonnemann and Joiner 2022). This is time that could be spent on better
lesson preparation and professional development — this inquiry’s companion volume From learning to
growth included several recommendations that could lead to more effective use of school teachers’ time.
These included replacing manual administrative processes with technology-based and automated solutions,and more curriculum implementation support such as through centralised provision of high-quality andgovernment-endorsed lesson plans and classroom tools.
Likewise, norms about the desirability and capacity for innovation (whether new altogether or new to theagency) vary across the public sector. In the Australian Public Service, all agencies participate in an annual64Innovation and diffusion in government services

census that includes questions about staff attitudes to innovation. While many staff believe one of their key
roles is to innovate, far fewer believe this is rewarded and indeed, a minority believe that their agencies accept
that failure is sometimes an inevitable feature of innovation or the adoption of new ideas (table 3.1). Other data
show that there is considerable variability across agencies in their ratings of innovation and management.
Table 3.1 – Attitudes to innovation in the Australian Public Service
2020-21
Statement
I believe that one of my responsibilities is to continually look

Positive(%)

Neutral
(%)

Negative
(%)

93

5

2

82

13

4

67

21

11

54

30

17

34

38

27

for new ways to improve the way we work
My immediate supervisor encourages me to come up withnew or better ways of doing things
People are recognised for coming up with new and innovative
ways of working
My agency inspires me to come up with new or better waysof doing things
My agency recognises and supports the notion that failure isa part of innovation
Source: APSC (2021a, p. 11).

In many cases, the barriers to innovation include both norms and regulations. Some of the largest barriers toworkforce innovation in key areas of public service delivery, especially healthcare, include funding
constraints, regulations, and long standing workplace practices and cultures (Pharmacy Guild of Australiasub. 67; PC 2021b, p. 68). Scope of practice restrictions can frustrate different care models and access toservices. The Australia Healthcare & Hospital Association observed:
With evidence that the current organisation of health professionals and their associated scope ofpractice is not suited to meeting the needs of the Australian health system [ … ] [w]ithout an
overarching strategy to achieve an integrated, multidisciplinary health workforce that works totheir top of scope, there will continue to be barriers in the redesign of models of care.
Opportunities to develop new models of care with flexible use of the health workforce andinnovative funding models should be leveraged. (AHHA, sub. 27, p. 2)
Increased use of electronic records, big data analysis and AI offer scope for some human tasks to be
performed by software, as in radiology, though any application requires regulatory approval (van Leeuwen etal. 2021). An emerging technology is model-informed precision dosing, which provides decision support toclinicians that takes account of the unique aspects of patients (age, co-morbidities, sex, ethnicity). But its
widespread use in healthcare requires data from electronic health records (which governments typicallymaintain and develop), funding models, regulatory acceptance and changing norms:
The challenge for Bayesian dosing moving forward is clinical acceptability. Indifference from the
medical and healthcare community is understandable. Pharmacometrics is completely absent
from medical school programs. Commercial providers rely largely on marketing to sell theconcept. Until Bayesian dosing is accepted by the healthcare community as decision-support
tools for some drugs, until funders see the economic and clinical benefits, and until regulatory
agencies clarify the status of these systems from a regulatory/legal perspective, the futureremains uncertain. (Darwich et al. 2021, p. 231)65

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Australia has made some steps to implement predictive analytics in healthcare, but some evidence suggests itlags many countries, with only 55% of health leaders claiming that they have already adopted this technology or
are about to do so (Philips 2022, p. 19). The rate is 66% in the United Sates and 92% in Singapore.

Finding 5.10
Structural flaws in government frustrate innovation and its diffusion
While slowness partly reflects divergent views about what amounts to best practice or innovation acrossdifferent governments, there are also major structural flaws in government processes that frustrate
innovation and diffusion. Uncoordinated actions of governments and agencies that share overlapping
roles, siloed services, clashing funding incentives and risk averse cultural norms tend to work against
experimentation. Few publicly operated services experience the risk that poor performance will lead totheir closure, unlike businesses.

3.3

What is to be done?

Governments and their agencies often innovate and adopt best practices, as already highlighted in examples
throughout this chapter. The challenge is to accelerate these and diffuse learnings about effective
approaches across governments and agencies that have yet to adopt such improvements. Many of theingredients for achieving this are well-known, but underexploited. Governments can use their funding andprocurement processes as levers to encourage the adoption of best practices, and also have opportunities toimprove diffusion in the ways they run their agencies and deliver services through better use of data,technology, skills and knowledge.

Improving funding and procurement approaches can drive diffusion
and innovation
Regular review and update of how government funding is allocatedGiven the significant amounts of funding allocated to various government services (discussed above), it isimportant that these funds are spent on practices and policies that have been proven to deliver desired
outcomes. Moreover, these should be periodically reviewed to ensure that funding continues to be allocatedbased on the most effective approaches, and reflects changing population needs.
For example, public transport fare setting in most jurisdictions suffers from policy inertia (PC 2021c, p. 24).
Fare structures are often based on historical settings without much review, with most jurisdictions using
simple and ad hoc approaches to setting fares and subsidies that do not systematically address equity or
efficiency goals. A superior approach to pricing developed by the Independent Pricing and Regulatory
Tribunal has been operational in New South Wales for some years (PC 2021c, p. 18), while Infrastructure
Victoria has undertaken considerable research on pricing reforms (Infrastructure Victoria, sub. 10, p. 1),though this is not yet reflected in policy. No other jurisdictions have moved to more sophisticatedapproaches, but there may be opportunities for governments to adopt more efficient pricing mechanisms andfare structures. This inquiry’s companion volume A competitive, dynamic and sustainable future includes arecommendation to improve public transport pricing by implementing pricing reforms that have been66

Innovation and diffusion in government services

suggested by independent bodies and better diffusing learnings about efficient pricing mechanisms acrossdifferent jurisdictions.
In primary healthcare, the Australian Government is the major funder and a source of clinical guidelines andadvice, but it has often struggled to contain unwarranted variations in clinician practice. According to the
ACSQHC (sub. 9, p. 7), ‘if clinical variation does not reflect a difference in patients’ clinical needs orpreferences, it is unwarranted and can present an opportunity for the system to improve’. Large variations inhealthcare can reflect different rates at which new practices spread through the health system or, worse, thepersistence of outdated and sometimes harmful practices (ACSQHC 2019, p. 46, 2021b, 2021a;
Duckett 2017, pp. 15–17; OECD 2017). Some examples include:• Over-prescription of antibiotics by GPs can lead to antibiotic resistance. A large percentage of patients arebeing prescribed antibiotics for conditions for which there is no evidence of health benefits from antibiotic
use such as non-infant acute tonsillitis (85% of patients) and bronchitis (82% of patients)(ACSQHC 2021a, pp. 79–80).
• Before changes to the Medical Benefits Schedule (MBS) in 2020 in response to COVID-19, GP telehealthservices were very limited, though the technology (the telephone) existed. Payments for telehealth wererestricted to only rural or remote areas and aged care facilities, and before mid-2011 were further confined
to psychiatric and radiology services (PC 2017d, p. 56; Tran and Haddock 2021, p. 6) despite evidence of
their benefits (Moffatt and Eley 2010).
• There are other technologies — such as wearables that gather and communicate health indicators toclinicians in a timely, efficient and unobtrusive manner — that are not supported by the clinical model
underpinning MBS funding (MTAA, sub. 33, pp. 5–6).
The striking variation suggests opportunities for improvement through more guidance, monitoring, education,and for some contexts and procedures, de-funding. The MBS was first introduced in 1984 and before
2015-16 had never been subject to a comprehensive review despite substantial changes to medical practice(Medicare Benefit Schedule Review Taskforce 2020, p. 1).
The government should regularly update the MBS so that funding is only provided to treatments that reflect
medical best practice, based on medical research both domestically and from overseas. Comprehensive
reviews take significant amounts of time — for example, the comprehensive MBS review that started in 2015
was completed in 2020. As research and feedback on medical best practice is constantly emerging, updates
to the MBS should occur more frequently and on a rolling basis where there is evidence that questions theefficacy or cost effectiveness of existing treatments. A systematic mechanism for this to occur would be for
the Medical Services Advisory Committee (MSAC) to undertake an annual review of selected MBS items todetermine whether they should continue to receive government subsidies. The list of items to be reviewed
each year should be targeted based on:• treatments where emerging Australian and/or international evidence questions the efficacy or costeffectiveness of existing procedures, including treatments that international bodies (such as the UK’s National
Institute for Health and Care Excellence) have recommended de-funding or replacing with new treatments• treatments that MSAC has received clinician feedback on doubting their effectiveness• highly costly treatments that receive large government subsidies through the MBS and have not beenreviewed in the past 10 years.
While MSAC’s remit already includes considering amendments to existing services funded by the MBS,much of its current activities focus on assessing new MBS items rather than re-evaluating existing ones.
More prominently incorporating such annual assessments as a standing function of MSAC may require theAustralian Government to provide higher levels of funding to MSAC so that it has the resources andcapabilities to undertake regular targeted reviews.
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Overcoming funding models that undermine innovation and best practice
Healthcare funding models
Funding models should reward increases in the quality and efficiency of outputs and encourage cost reductions
for government service bundles, whether that service is ultimately delivered by government or an external
service provider. The word ‘bundle’ is important because many existing government-funded services are
unbundled (or siloed) and then provided or managed separately by different arms and levels of government.
The prime example of such siloing is healthcare with its fractured funding and governance mechanisms. The
customer is equally fractured by unbundled services. They are a customer of a pharmacist, a patient to a
GP, an admission to a hospital and a case to an outpatient service — four different people through the eyesof the current system. It makes sense to re-assemble them into one human being and provide them
integrated care at whatever point they touch the system.
Healthcare funding, delivery and oversight should be managed as if there was only one level of government
holding responsibility for it, recognising that creating this single virtual agent requires re-configuration ofexisting government funding models, changes in regulations (such as the Health Insurance Act 1973 (Cth))and greater data sharing between different parts of the health system. The latter is discussed in this inquiry’scompanion volume Australia’s data and digital dividend, which recommends that the government implements
improvements to My Health Record so that it can be the foundation for a comprehensive health data sharing
system across all parts of the healthcare sector.
Various capitation models, such as the Victorian HealthLinks program, are promising contenders for wider
application for chronic disease management and preventative care, as are bundling payment models forconditions (such as hip and knee replacements) that need predictable coordinated care spanning the whole
health sector. The ideas of the Consumers Health Forum of Australia (2020), various reports from theProductivity Commission (PC 2017d, 2020e), the Grattan Institute (Breadon 2022; Duckett 2017, 2018b;
Swerissen and Duckett 2018) and others have set out reform directions that could apply at a greater scale,even if the details vary.
The institutional and funding models to support reform of hospital funding are much better developed thanunder the previous health agreement between the Australian, State and Territory governments. Under the2020 addendum to the National Health Reform Agreement, the Independent Hospital Pricing Authority (nowthe Independent Hospital and Aged Care Pricing Authority — IHACPA) has the capacity to reimburse
hospitals for their participation in state-sponsored innovative fixed-term funding trials (First Ministers 2020;
IHPA 2022). IHACPA will advise governments on any trial that might be nationally applied, yet there is noformal transition path to any Australia-wide systemic change to hospital funding.
The advantage of new funding models is not just that they bring to fruition ideas that have long been
advanced and used overseas, but that they underpin the diffusion of other innovations. Were a hospital given
appropriate incentives, there are hundreds of novel ways of preventing unnecessary, or shortening theduration of, hospitalisation that it could be motivated to introduce. Similarly, new funding models for improved
primary care — even if not directly coordinated with hospitals — can better manage and prevent chronic
disease, as shown in the case studies examined by the Productivity Commission (PC 2021b). The main
problem is not a lack of appetite for changes in funding models, but the slow pace of scaling up promising
initiatives. The rapidity of health system adaptations to the COVID-19 pandemic suggests that there should
be scope for acceleration.

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Contract lengths for human services
Contract terms set by governments can frustrate innovation and diffusion through excessive prescription(PC 2016b, p. 32) and limit the capacity for user choice to encourage best practice and innovation among
service providers. Funding contracts for community organisations delivering government-funded services areoften too short (sometimes only 12 months) and with low certainty of renewal. This limits the capacity forcommunity organisations to set up, develop their skills and processes, learn from experience, and invest ininnovation. Re-tendering can also take up considerable resources and management time better spent on
raising the performance and capability of the agency.
While shorter-term contracts may seem to control risks, there are other ways of doing this without stifling
innovation. In its assessment of various government services, the Productivity Commission concluded that
contract durations should be longer than the usual default. The Commission recommended default contract
lengths of a minimum of seven years for providers of children and family services in the Northern Territory(PC 2020b, p. 37), which is consistent an earlier finding of seven years as an appropriate contract length forhuman services generally (PC 2017c, p. 24). The appropriate contract length may vary depending on several
factors, such as the type of service being provided and the location of provision; for example, theCommission’s mental health inquiry recommended that funding cycles for psychosocial support services
should be increased to a minimum of five years (PC 2020e, p. 843). Suitable contract lengths could bereconsidered for contracts that are retendered upon their expiry.

A citizen-centred approach to funding
Funding models for government services centred on consumer-directed control underpin a different kind ofdiffusion and innovation — the capacity for consumers to engage imaginatively with mainstream providers,and for providers to compete based on their ability to service consumers’ needs. On the one hand, contractand funding arrangements can diffuse best practice among providers for that model of service provision. But
in many cases, best practice is to let the citizen decide how to arrange the services that meet theirpreferences, subject to an appropriate budget limit. Citizen-centred funding models are particularly beneficial
for delivering human services, as they allow service providers to receive signals from citizens about what
they value most, with the flexibility for providers to implement innovations that can meet these needs in eithera specialised or general way depending on the citizen’s preferences. This applies both for human services
delivered by government and those funded by government and delivered by an external provider.
An example of this from a previous Productivity Commission inquiry (PC 2011) was of a young person with
Down’s Syndrome who used to receive services from specialist disability providers, being picked up by a bus
for people with disabilities and taken to activities that might or might not interest them. When given a budget
for services, the person learned how to take public transport, to go the cinema and to buy her favourite mealfrom McDonalds, which she loved. Best practice was not the achievement of the most efficient allocation of
resources within an enterprise, but the meeting of the preferences of the person.
Governments can much better diffuse this different way of organising resources in some of its other services.
For instance, in the housing policy space, the Commission noted that financial assistance to people in needshould be user-centred and enable them ‘to have a genuine choice over where they live [which] would
improve the responsiveness of the social housing system to the requirements of tenants by increasing
competition between housing providers’ (PC 2017c, p. 15). It also found in the 2022 Housing andHomelessness Agreement Review that delivering housing assistance through government subsidies tied toproperties can lock renters into homes that do not meet their needs, as should preferences andcircumstances change they are unable to move without losing the assistance (PC 2022b, p. 281).

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There are also other human services where governments could encourage provider innovation and improve
resource allocation via a more citizen-centred approach. This includes end-of-life care, where governments
should initially prioritise ensuring wider availability of high-quality services that place users’ interests at thecentre of delivery and, in the long term, offer users choice of provider where feasible (PC 2017c, p. 138).
And in public dental services, ‘giving users greater choice over their dental provider can also generate
incentives for providers to be more responsive to patients’ needs as they are only funded when users choose
them’ (PC 2017c, p. 387). And healthcare is another policy area where governments can shift to a more
person-centred funding approach to foster innovation and improve patient outcomes. More co-operative
funding mechanisms would enable more integrated healthcare centred on a patient’s needs, such as byencouraging longer-term and/or preventative care, which are not well supported by the current health funding
system (PC 2021b, p. 145).

Recommendation 5.6
Using health and human service funding approaches to improve diffusion
Governments should use their funding and procurement approaches to drive improved efficacy, innovationand diffusion in health and human services that they deliver or contract external service providers todeliver. This could include:• improving the diffusion of good practice in primary healthcare by regularly updating the Medicare
Benefits Schedule (MBS) to reflect effective treatments. The Medical Services Advisory Committee(MSAC) should be required to undertake an annual rolling review of selected MBS items, focusing on
treatments where emerging evidence or clinician feedback questions their efficacy or cost effectiveness.
The Australian Government should assess the need for higher levels of funding for MSAC to undertakethese annual reviews as a standing function• implementing funding models that support the diffusion of innovation in healthcare, including
preventative care, and a more patient-centred approach by aligning incentives across different parts of
the health system. This includes by accelerating and scaling up long-term co-operative funding
mechanisms that align the incentives of primary and hospital providers to avoid costly hospital
admissions and support integrated care, such as capitation models that have demonstrated successand other mechanisms supported by the Independent Hospital and Aged Care Pricing Authority.
Governments should also seek to overcome obstacles to implementing co-operative models, such aschanging the Health Insurance Act 1973 (Cth) and improving data sharing• encouraging human service providers to innovate and compete to meet consumers’ needs by providing
citizens with more control over how government funding allocated to these services is spent. This could
apply to the allocation of housing assistance to people rather than properties, end-of-life care, publicdental services and healthcare• increasing default contract lengths to 5–7 years for government-funded services delivered by community
organisations to support innovation and diffusion. Suitable contract lengths will depend on the type of service
provided, and the lengths of contracts that are retendered could be reconsidered upon their expiry.

More broadly, funding models and regulatory settings for health and human services have tended to befocused on inputs rather than outcomes. For example, fixed labour ratios are a feature of many of these
services, including in hospitals and child care provision, and activity-based funding — while leading toefficiency gains in the past (discussed above) — can lead to providers limiting the design and delivery of
their services to the specific activities that are funded. These approaches often exist for good reason. In

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government-funded human services, consumers may have incomplete information about the quality ofproviders, are often vulnerable (due to age or disability) and have fewer incentives to properly hold providers
to account (as they do not face the full cost of their service).
However, these input measures can inhibit service providers from adopting innovations that would deliver thesame, or better, outcomes for consumers. The benefits of regulating for quality assurance therefore need to
be balanced against the costs from discouraging productivity-enhancing innovation. Shifting towards
outcomes-based approaches to allocating funding and regulating quality would give providers more flexibility
to adopt innovations that allow them to meet their obligations in the most effective and efficient way possible.
Such a shift could also include exemptions from input measures if a provider can demonstrate that they haveachieved quality in other ways. This should be a longer-term reform direction pursued by governments at alllevels, to incentivise innovation, competition and productivity gains in these government-funded services.
One prerequisite for doing this is improving data collection about the outcomes that matter in health andhuman services and better understanding the factors underpinning differences in performance (so thatoutcomes-based funding can be implemented to account for these factors, where they are not within thecontrol of service providers). This is discussed further below and in recommendation 5.9.

Finding 5.11
Funding models and regulatory settings based on input measures can stifle innovation
While input-based approaches to funding models and regulatory settings (such as fixed labour ratios andactivity-based funding) can have benefits for quality assurance, they can also limit the potential for
innovation in government service delivery. Shifting towards outcomes-based approaches to allocating
funding and regulating quality would give service providers more flexibility to adopt innovations that allow
them to meet their obligations in the most effective and efficient way possible.

Infrastructure and equipment procurement
Outside of human services, there are other ways in which government procurement could encourage bestpractice. Procurement of public infrastructure like roads, bridges, hospitals, and prisons has often preserved
out-of-date approaches that have constrained collaboration and innovation and missed opportunities fordeferring upgrades and replacements. For example, it has been estimated that 37% of requests for
proposals in public infrastructure projects suffer from unclear project objectives (DAE 2015, p. ii). Some 45%
of professional service firms commissioned by the public sector for infrastructure projects say their clientswere unresponsive to innovative suggestions during tender processes (ibid p. vi).
For their part, current key users and constructors are pessimistic about government and industry’s overall
uptake of best practice procurement approaches. Roads Australia (sub. 25, pp. 3–4) argued that the state
and territory pipeline for new infrastructure has been overly ambitious given that governments and industry
struggle with ‘outdated, inflexible commercial frameworks’, notwithstanding superior options. The Civil
Contractors Federation considered that adoption of best practice in government procurement had been
weakened by the loss of in-house technical capability in procurement agencies (sub. 38, p. 3). This highlightsthat one of the key determinants of adoption of best practice are the skills of government agencies.
Moreover, all states are undertaking large complex projects with major exposure to risks of cost blowouts,
design flaws, delay and uncertain patronage, but without (it seems) sufficient knowledge sharing between
them about the contractual and other ways these risks may be mitigated.

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One approach that has the potential to drive better quality and productivity outcomes in public infrastructureis the use of collaborative construction procurement models, in which contractors are involved early in theplanning and scoping stages of the project (Australian Constructors Association, sub. 73, p. 8; IA 2022). This
will require strengthening expertise in public sector procurement agencies, as well as greater understandingof alliance and collaborative contracting models.
There are a small number of recent examples of public infrastructure procurement with more collaboration
between the government client and contractor, including Transport for New South Wales and Victoria’s Major
Transport Infrastructure Authority (which oversees the Level Crossing Removal Project) trialling Incentivised
Target Cost contracts (Roads Australia, sub. 151, p. 2). The Australian Constructors Association commented
that the use of relational contracting in the Level Crossing Removal Project has led to higher productivity andenhanced innovation. Contracts were structured to allow construction teams that achieved minimum
standards on a crossing removal to be employed for future crossing removals, thereby ‘reducing the churn ofpeople and maintaining that knowledge base on the job’ (ACA, trans., p. 84). However, some stakeholders
have highlighted that there are still areas for improvement (Roads Australia, sub. 151, p. 2).

Recommendation 5.7
Collaborative procurement on major projects to increase productivity
The Australian, State and Territory Governments should improve the quality and productivity outcomes ofpublic infrastructure projects by increasing the use of alliance contracting or collaborative contracting for major
projects, so that contractors are involved earlier in the planning and scoping stages of a project. This could also
include building incentives into contracts for the achievement of certain targets or standards.

In some instances, best practice procurement is not to procure at all because the dollars could be spentelsewhere on better outcomes for the public. The oft-repeated admonition to apply genuine, disinterested,
rigorous cost-benefit analysis (CBA) of major projects suffers from its forgettability. Everyone says it is agood idea. All jurisdictions and many agencies have developed guides about how to do it (see, for example,
ATAP 2018; Infrastructure Australia 2021). Essential elements of best practice CBA include independent
evaluation of assumptions and inputs (such as cost estimates and demand or benefit forecasts, involving
external experts where required), transparency (for example, showing breakdowns of cost and benefit
calculations and being clear on how different scenarios were selected) and accountability (by governments
as to how CBA outcomes have been used — or not used — in their project decisions).
But compliance with best practice is piecemeal, and the outcomes of the analysis may not have any effect on
project choice. The consequence is that big public infrastructure projects routinely suffer from optimism bias,
with large cost blowouts and long completion delays. In 2020, the Grattan Institute estimated that cost
overruns on transport infrastructure in the preceding two decades totalled $34 billion in government
expenditure, and that at the time of writing six current projects (including Inland Rail, Melbourne’s North East
Link and the Sydney Metro City & Southwest) had already accrued cost overruns of $24 billion (Terrill,
Emslie and Moran 2020, p. 3). More recently, many infrastructure projects involving substantial public funds
were committed to by governments before Infrastructure Australia had completed an assessment(Terrill 2022, p. 28). Even if improving the use of CBAs only leads to a slight shift in government decision
making and a small reduction in cost overruns in percentage terms, this would amount to substantial
improvements in resource allocation and efficiency gains in dollar terms given the size of these projects.

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Governments should therefore commit to institutional and governance arrangements that adopt the
aforementioned elements of best practice CBA. An example of such an institutional arrangement is the
Washington State Institute for Public Policy (WSIPP) in the United States. WSIPP is a non-partisan publicresearch group that applies a consistent CBA model across multiple state-level policies to provide‘policymakers and budget writers with a list of well-researched public policies that can, with a high degree ofcertainty, lead to better statewide outcomes coupled with a more efficient use of taxpayer dollars’(WSIPP 2019). It uses a standardised set of measures to promote comparability, including a normalised
approach to meta-analysis that generates consistent (but context dependent) measures of effect sizes(WSIPP nd, pp. 2–4) and a prescribed method for conducting sensitivity analysis on costs and benefits(WSIPP nd, p. 2). This improves transparency by giving the public reliable and comparable measures togauge the effectiveness of a range of policies.
In Australia, the government has committed to establishing an Evaluator General, which aims to improve themeasurement of policy and project outcomes and work with other government departments to conduct
high-quality program evaluations (Leigh 2018, 2022). Such an entity could be a starting point for improving
CBA practices (for example, by providing independent evaluation of CBA assumptions and inputs), notingthat the proposal is at the Commonwealth level, so efforts would still be required to increase the quality,
consistency and comparability of CBAs undertaken at the state and territory level.
While improving the quality of CBAs is important, whether government officials select projects in line with theresults of robust CBAs is another matter. At a minimum, CBAs should be provided to government decision
makers before an investment decision is made, so that the results can be factored into project choice. The
Grattan Institute previously recommended that before government funds are committed to an infrastructure
project valued at $100 million or more, independent infrastructure advisory bodies in the states and at theCommonwealth level should have a legislated role to independently assess the quality and assumptions
underpinning the project’s business case, costs and benefits, and publish this assessment. Althoughultimately the project decision would still be made by an elected government official, ‘the scrutiny on costmanagement and infrastructure investment decisions would be increased. This scrutiny would serve to betteralign politicians’ incentives to the public interest’ (Terrill, Emslie and Moran 2020, p. 34).
While harder to do, and probably more open to manipulation, CBA also has strong relevance to other government
activities like defence, social programs, and healthcare. Dobes (2008) argued that the traditions and expertise of
these areas of government predisposes them to use other tools for assessment, like cost effectiveness studies,
which provides less guidance to governments about how to allocate finite budgets across projects that are very
different in their nature. That assessment remains relevant. Notably, an assessment by the Productivity
Commission of programs for Aboriginal and Torres Strait Islander people found CBA and other tools to measureoutcomes were rarely used (PC 2020a). But while billions seem to be on the pavement for the picking, a proventool is neglected. There is a strong need for practical solutions to this predicament.

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Recommendation 5.8
Improving the efficacy of public expenditure through better investment decisions
Governments can improve the efficacy and productivity outcomes of public expenditure throughinstitutional and governance arrangements that address the systemic absence or disregard of rigorouscost-benefit analysis (CBA) for both major infrastructure projects and in other government activities, suchas defence and social services. Such arrangements should include:• independent evaluation of the assumptions and inputs used in a CBA, which could be undertaken by asingle institution across the State, Territory and Commonwealth levels to support consistency andcomparability across different projects and programs. The proposed Evaluator General at theCommonwealth level could be a starting point for this improvement• transparency about the analysis, including on cost and benefit estimates and forecasts and scenario
selection, with independent assessments to be published and provided to government decision makers
before an investment decision is made• government officials aligning their investment decisions with CBA results, and being held accountablefor how the CBA outcomes are used — or not used — in project selection.

Defence procurement has long been a contentious issue, bedevilled by concerns about mixed and often
inconsistent objectives (defence capability and assistance to industry), cost overruns, technical failures, andthe weighting given to Australian exceptionalism (‘we have unique needs’).
Some problems arise from the extraordinary complexity of much defence equipment, systems, and software.
Complex defence equipment and associated software involves sophisticated manufacturing, information
technologies and a highly-skilled workforce. These are slow and risky to develop for bespoke and specialised
capabilities. Such capabilities also require other specialised inputs, such as training systems, facilities, anddocumentation, and involves costs to integrate the new technology into existing ones (Hellyer 2022).
It is not feasible for Australia to develop expertise or domestic capabilities for all such equipment andsoftware. Moreover, attempting to undertake multiple defence projects can slow down the production of any
single one, which lowers productivity. It can also pay to wait if government plans to produce equipment
already in production overseas, as there can be learning economies as global production ramps up(Markowski, Hall and Wylie 2010, p. 91ff). The early adoption of complex equipment may require adaptation
to remedy design and production flaws that only become clear after commencement of production.
Depending on the context, buying an already proven technology from overseas and not quickly, if ever,developing a domestic production capability is likely to be optimal in many contexts. A sophisticateddomestic capability to use, store and maintain equipment would still be required regardless of where it was
sourced from but would involve lower costs than domestic production and assembly.
The Productivity Commission has catalogued instances of large defence procurement projects that involve
effective rates of assistance for domestic production of up to 300% (PC 2019, p. 34). This is an extraordinaryrate in the context of the other industry assistance, which has dwindled to between 0 and 5%. The
transparency that would normally apply for many other procurement activities is lower because of security
concerns, though this does not justify the present level of opacity. The Australian National Audit Office, forexample, was prevented from publishing its conclusions on the effectiveness and value for money of the$2.2 billion acquisition of the Hawkei vehicle (PC 2020i, p. 17).

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The ambitious Collins class submarine program provides an example of what can go wrong and what might
be done to shift the procurement mindset. At conception in 1982, the goal was to acquire 10 boats at$100 million each (1982). By December 1999, the cost of the fewer planned boats was $850 million each
(Woolner 2001). Of the five boats in the water in 1999, none were performing adequately (McIntosh andPrescott 1999). The problems stemmed not just from the inevitable difficulties in acquiring highly complex
products, but from the unique design, the contracting model, the decision to build locally, and project
oversight among many other things. Not all aspects of the Collins program were disastrous, but defence
acquisitions are so costly to taxpayers and so important for effective defence, that the returns from getting
closer to best practice procurement and management would be worth tens of billions of dollars. (Defence
spending is anticipated to be about $270 billion over the next decade (Department of Defence 2022, p. 9).)
Defence procurement is ripe for deep and disinterested scrutiny of its processes. There are strong grounds
for re-thinking defence procurement, drawing on advice from those outside defence. The independent
Defence Strategic Review has been tasked with ‘identify[ing] and prioritis[ing] the estate, infrastructure,
disposition, logistics and security investments required to provide Australia with the Defence force posturerequired by 2032-33’ (Australian Government 2022a, p. 2), including outlining future investment, mobilisationand funding needs. It provides an opportunity to consider the issues outlined in this report and will deliver its
recommendations to government no later than March 2023.

Finding 5.12
Defence procurement has often had mixed goals, used imperfect processes that have led
to cost-overruns and failed to achieve the desired capabilities
Defence procurement has often had the mixed goals of achieving a defence capability and providing
industry assistance. Imperfect processes have led to cost-overruns of billions of dollars and failed toachieve the desired capabilities. The productivity and efficiency benefits of better practices are large given
the $270 billion of anticipated defence spending over the next decade.

Other opportunities to improve public sector diffusion
Data, benchmarking and accountability
Benchmarking can provide good incentives for public sector services to adopt best practice. Governments
are already sophisticated at benchmarking their performance with reporting across many services — as in
the Productivity Commission’s Report on Government Services, MySchools, MyHospitals, the AustralianAtlas of Healthcare Variations, and publication of sentinel events in hospitals. State and territory
governments have developed (and continue to refine) measures of the comparative performance of the morethan 550 local governments providing municipal services (with a Victorian benchmarking tool shown infigure 3.2). The benchmarking tools improve the accountability of local governments to their citizens andprovide incentives for them to improve their practices. This is buttressed by a range of non-government
agencies that provide benchmarking models that pool data from local governments to deliver individualised
advice on improvements (Smith 2021).

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Figure 3.2 – Benchmarking local government performance
Benchmarking garbage collection costs across local governments in Victoria

Lowest 25% ofvaluesThe next
lowest 25%
of values

The second
highest 25%
of values

Highest 25% ofvalues

Source: VAGO (nd).

New assessment instruments, such as Patient Reported Experience Measures (PREMs) and Patient
Reported Outcome Measures (PROMs) have been developed to get better feedback on outcomes frompatients and are in tune with the re-orientation of healthcare to a patient-centred model. At August 2022,
there were 275 validated condition-specific PROMs (ACSQHC 2022). The Productivity Commission has
previously noted that putting greater emphasis on reporting such patient-centric outcomes, as well as
indicators on clinical outcomes such as hospital readmission rates, would further encourage
self-improvement across the healthcare sector (PC 2017c, p. 53). This would also assist in reducing variationin health service delivery across different providers (section 3.2).
There are pitfalls in benchmarking than can undermine its credibility, such as the risk that parties have
incentives to manipulate embarrassing data. This occurred in the ACT when 11 700 records were found tohave been falsified for Canberra Hospital over a three-year period (ACTAO 2012, p. 11). It has been allegedthat some schools — wary of the reputational damage of poor NAPLAN results — discouraged somestudents from sitting the exam, though there is little evidence of the extent of the issue (EERC 2014, p. 17;
McGaw, Louden and Wyatt-Smith 2020, p. 78). Audits and whistleblowing can help limit these risks, but so
too can deeper analysis of data.
As data gathering and linking by governments increase, the scope for deeper analysis of why there arevariations in performance will grow and provide a stronger evidence base for scrutinising the performance ofgovernment-funded or operated organisations. For example, school performance depends on funding,76

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student background and traits, and teacher and leader quality among other things. Without controlling forsuch aspects, a school might appear to perform poorly despite being a high performer given thecharacteristics of its students. Evidence about what works in the classroom needs observation and data
linked across students and schools. The Commission’s assessment of the National School Reform
Agreement (PC 2022c) highlighted that a unique student identifier for school students nationwide would open
up the capacity for richer understanding of the determinants of school and student performance. As
discussed in this Inquiry’s companion volume on digital technologies, Australia’s data and digital dividend,
the ongoing creation and integration of government datasets will be a major source of value.
Accordingly, the next big and ambitious step for benchmarking data across all significant government
services is to provide more like-with-like comparisons that enable a publicly funded or delivered service inany given area to grasp how far away they are from the frontier and why that is so. For example, thebenchmarking comparisons of local government garbage collection costs in figure 3.2 would be enhanced if
it controlled for the population of the area and its density. And the Commission has previously recommended
that in healthcare, reporting at the individual practitioner level (for instance, individual specialists and allied
health professionals) should include both clinical outcomes and details such as location, activity levels andout-of-pocket charges, to facilitate better comparisons and more targeted performance improvements(PC 2017c, p. 53).

Recommendation 5.9
Using performance data on government services to diffuse best practice
Governments should collect and use data on service outcomes and provider performance to benchmark
their own service delivery and diffuse best practice. This should go beyond simple descriptive
performance comparisons by providing more like-with-like comparisons, so that governments and service
providers can understand what is driving differences in performance and how, when not justified, thesedifferences could be narrowed.

Skills in the public service workforce
The Thodey review (PMC 2019) found many flaws in the Australian Public Service in which skill andleadership deficiencies were predominant. (Some of these problems are manifest in the results shown infigure 3.1.) Similar issues will affect public sector organisations across all levels of government andfunctions, especially considering economy-wide skill pressures.
The vast numbers of people employed in the public sector — about 250 000 in the Australian Government,
1.7 million in state and territory governments and 190 000 in local government (ABS 2021b) — means that
there will be natural variation in people’s aptitudes. While overall performance can be raised, there are limits.
Nor is it unambiguously beneficial to attract more of the ‘best and brightest’ into the public sector. They arealso critical in the business and not-for-profit sectors. In teaching, for example, the appropriate aspiration
may be to attract the good (and those best suited to the role) and to better use pedagogy, coaching andsoftware to maximise their effectiveness as teachers.
But one area where skills could readily be augmented without significant cost is through a reformed
immigration system. As discussed in chapters 1 and 2, the movement of people between different
organisations is an important conduit for transferring ideas.

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While this inquiry’s companion volume A competitive, dynamic and sustainable future discusses
improvements to Australia’s skilled migration policy more generally (many of which are as apt for public
services as they are for the business sector), there are specific restrictions to recruiting people from outside
Australia in the public sector that are stifling innovation and diffusion of global best practice in government
agencies. These include antiquated security, citizenship and residency requirements; in particular, Australian
citizenship is a usual requirement for permanent appointments to the Australian Public Service. Acrosspublic service agencies, there are processes to gain exemptions, but they are unduly bureaucratic.
Lowering the transaction costs of attracting people outside Australia to be in the public sector would raiseskill levels, but above all bring new ideas from countries with different models of public sector services. One
way of implementing this could be to have expedited security approval processes for overseas workers thathave already obtained similar levels of clearance in their home country, where Australia has a security or
intelligence agreement with that country (for example, the Five Eyes alliance). For example, somestakeholders have proposed that as part of the AUKUS agreement, there could be an accelerated security
clearance process whereby UK or US workers who have been vetted in their home country could beconsidered for security clearance to work on defence projects in the Australian Public Service, regardless ofAustralian citizenship (PwC Australia, American Chamber of Commerce in Australia, and Australian British
Chamber of Commerce 2022, pp. 25–26).

Recommendation 5.10
Recruiting public sector workers from overseas to bring in global best practice
Improve the diffusion of global best practice in the public service by loosening the security and citizenshiprequirements, and overly bureaucratic processes, which currently limit the recruitment of workers fromoutside Australia who bring innovative ideas and different models to the public service. This could include
expedited security approval processes for overseas workers who have already obtained similar levels of
security clearance in their home country, where Australia has a security or intelligence agreement withthat country (for example, the Five Eyes alliance).

Diffusion bodies and innovation funds with a charter for diffusion
Good ideas often languish because they are lost in the quagmire of other information, are poorly
communicated, have not been validated, but above all, require costly changes to the recipient organisation.
Those costs arise due to crowded agendas, time poverty, limitations in skills, incompatible software, resistantcultures, and lack of clarity about effective implementation. Moving people with the ideas into the recipientorganisation is one avenue because they can gain trust and know the details about implementation — forexample, staff secondments from one government department to another enable learnings about designingand implementing programs to be transferred between different (but related) policy areas (APSC 2021b). But
this will rarely be an option if the innovation comes from one organisation without adequate resourcing forthis diffusion function, as was evident in many of the Productivity Commission’s case studies of innovative
practices in managing and preventing chronic disease.
There are several options to reduce these problems.
• Show how a potential recipient’s organisation is faring compared with similar organisations to motivate
adoption (see benchmarking, discussed above).

78

Innovation and diffusion in government services• Demonstrate concretely the value of a new way of doing something, supported by evaluation, andshowing that scaling up of the idea is feasible.
– Just publishing evaluations is a good step. In the area of Indigenous program evaluation, theProductivity Commission found that of 509 Australian programs from 2016-17 to 2019-20, only 44%
were public (PC 2020d, p. 104). More publication of evaluations could be a focus of the government’s
proposed Evaluator General (discussed above).
– Innovative new approaches adopted by one service provider can be used as case studies that others
can learn from. For example, in healthcare, Monash Watch is a Victorian telephone outreach programthat identifies people at risk of repeat hospitalisations and supports continuous health checks andsupport services through Care Guides who call consumers regularly, and Health Coaches who triage
the calls and arrange necessary health services. Interim results show that Monash Watch is achieving a
20-25% reduction in hospital acute emergency bed days compared with usual care (PC 2021b, p. 61).
Monash Watch has already expanded from its original location in Dandenong with a second team
operating in Cranbourne. Moreover, the initiative is being incorporated into Monash Health more
broadly and the approach is expanding to other health services across Victoria.
• Exploit the reputation of existing longstanding institutions with strong brand names that already act asrepositories of best practice to be more active disseminators using the now established principles of
implementation science.
– For example, this includes the Australian Commission on Safety and Quality in Health Care forhealthcare; the CSIRO for science and research; and the Australian National Audit Office for public
administration. Newer bodies such as the Australian Education Research Organisation for school
education and Aged Care Research and Industry Innovation Australia for aged care could also play asignificant role in diffusing best practice in the future.
• Use existing networks. Regulators and service providers across jurisdictions often meet (for example,
competition regulators, liquor and gambling licensing bodies, primary health networks). The norm —encouraged by government — should be consideration of adopting innovations developed in one
organisation to another.
• Encourage open standards so that software compatibility problems reduce over time.
• Appoint dedicated diffusion champions to diffuse best practice and new technologies from around
Australia (and global peers). These champions would generally be in the longstanding institutions
described above.
A challenge in some areas of the public sector is that there is no obvious body to act as a diffuser. In
some instances, it may be worthwhile establishing a generic innovation fund that supports public sector
innovation and then diffuse it. The Victorian Public Sector Innovation Fund is an example, though its
effectiveness is unknown. In its Mental Health Inquiry, the Productivity Commission proposed a Mental
Health Innovation Fund to trial and evaluate innovative service delivery, system organisation and payment
models (which so far, has not been implemented). Where there are material gaps, there may be grounds for
similar bodies.
This is especially so where government-funded services are delivered by smaller and highly decentralisedorganisations (as in employment service providers, disability and childcare) that have little expertise indiffusion, few resources and little individual motivation to invest in activities whose returns are spread over
the whole industry.
A hazard in some efforts to diffuse ideas is that they are based on loose networks with insufficient focus
and funding to sustain them. The Public Sector Innovation Network had lofty goals for diffusing best practice79

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

methodologies and a place for developing networks between experts in the Australian Public Service. But it
appears to have vanished (DISR 2020), though ghosts of its presence still linger on the web (AustralianGovernment 2022b). There may be grounds for encouraging new diffusion networks, but only if they are
sufficiently focussed, involve practitioners in the relevant area, and have a clear goal of diffusion.
In some instances — such as (virtual and physical) communities of practice — there are often strong enoughincentives for participants to sustain the network and to share their knowledge because they obtain
day-to-day benefits and share a direct interest in the knowledge being exchanged (Mullan et al. 2022; Shawet al. 2022). But networks that lack those features and involve discretionary efforts by busy people acrossagencies and service providers rarely survive because the enthusiastic people move on or because urgent
tasks displace longer-term goals.

Recommendation 5.11
A bigger role for diffusion bodies
Expand or strengthen the role of existing diffusion bodies — such as the Australian Commission on Safety
and Quality in Health Care, Aged Care Research and Industry Innovation Australia, Australian Education
Research Organisation, CSIRO and Australian National Audit Office — with the aim of disseminating bestpractice, including the elimination of practices no longer underpinned by adequate evidence. Trial
innovation funds in selected public services where there is no existing body for diffusing best practice,such as in mental health service delivery.

Foundations for diffusing regtech
Governments can facilitate more use of technology and diffusion of best practice in many industries throughits use of and support for regulatory technology, or ‘regtech’. Regtech can be a more efficient way ofdesigning and implementing regulation for both businesses and government, as well as improving the qualityof regulation and opening up new opportunities for streamlined regulation (PC 2020h, p. 9).
For example, in the agriculture industry, the Australian Government is providing grants for regtech initiatives
that can assist in streamlining compliance obligations, improve traceability across agricultural supply chains
and ultimately increase regulatory efficiency in the sector (DAFF nd). And the single touch payroll (STP)
system has enabled businesses to automatically report their pay, tax and superannuation data to theAustralian Tax Office via their STP-enabled payroll accounting software, resulting in lower compliance costs
and greater speed and accuracy. (The benefits of this initiative, including providing rapid monitoring of theeconomic impacts of COVID-19 (Andrews, Hambur and Bahar 2021; PC 2020h, p. 10, 2022a, pp. 48–49)
and stimulating the take-up of technology by small businesses, are discussed in further detail in this inquiry’scompanion volume Australia’s data and digital dividend.)
Regulations can be implemented in a way that lends itself to developing regtech solutions, such as throughthe coding of regulatory rules into machine-interpretable formats (PC 2020h, p. 24), which makes the detailsof complex regulation easily accessible to regtech software providers. Creating regulatory ‘rules as code’,such as the NSW Government’s machine-readable version of the Community Gaming Regulation 2020
(NSW), ‘allows industry and government to embed digital rules directly into their IT systems to streamline
compliance and automate any changes in the future. In addition, consumers are able to navigate this digital
version of the regulation easily via an interactive questionnaire’ (ACMA 2021, pp. 12–13). When new
regulations are likely to be amenable to a regtech solution, governments should implement them in a80

Innovation and diffusion in government services

machine-interpretable format at the outset, so as to avoid the need to go back and codify such regulations in
the future (which may be more costly).
Relatedly, the government has an important role to play in promulgating consistent data fields and formats thatcan be used in regtech, such as work the ATO has done through the Digital Partnership Office (see thisinquiry’s companion volume Australia’s data and digital dividend). For example, in the case of Standard
Business Reporting, the Australian Government’s taxonomy and list of data fields allowed digital service
providers to build new compliance solutions to automate regulatory reporting for businesses (PC 2020h, p. 23).
Software providers can use existing databases to create regtech solutions; however, by adopting a ‘rules ascode’ approach and consistent data standards, governments make it easier for industry to design compliant
solutions. Working with providers of regtech solutions can assist in identifying areas that would benefit mostfrom these approaches. There were about 80 regtech providers headquartered in Australia in 2020, which
compared favourably relative to other developed countries (figure 3.3), suggesting there is scope forgovernment and industry to collaborate in rolling out regtech solutions. This can improve regulatorycompliance and efficiency; for example, in implementing Single Touch Payroll, the ATO worked closely withdigital service providers to ensure that payments could be reported directly from payroll software in a waythat met regulatory requirements (ATO 2019, pp. 2–3).
Figure 3.3 – Australia is a hub for regtech companies
Number of regtech headquarters by country, 2020
200

Number of regtechs

180
160

140
120
100
80
60

40
20
0

Source: Wray et al. (2020).

One area with potential for greater diffusion of regtech is workplace relations. Numerous companies alreadyoffer payroll software solutions with automated award interpretation; that is, software that automates payrollchanges when changes to modern awards occur. The process could be further streamlined, with the Fair
Work Commission currently developing an application programming interface — co-designed with software
providers, peak bodies and unions — that will enable software providers to connect directly to its modern
awards pay database as a ‘source of truth’ on wages and entitlements (Hendry 2022). This would mean that,should the government make future changes to modern awards, it would be easier for software providers toaccess information about the changes and accurately integrate them into their regtech solutions.

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5-year Productivity Inquiry: Innovation for the 98% Inquiry report

Recommendation 5.12
Encouraging regtech development and diffusion
Governments should support greater use of productivity-enhancing regtech by:• providing regulation in forms that lend themselves to regtech solutions, such as coding regulatory rules
into machine-interpretable documents, like the NSW Government’s machine-readable version of theCommunity Gaming Regulation 2020. New regulations that are likely to be amenable to a regtech
solution should be implemented in a machine-interpretable format at the outset, to avoid the need to go
back and codify such regulations in the future• working with software providers to identify areas where they could improve foundational settings toencourage industry to design compliant regtech solutions. The Fair Work Commission’s efforts todevelop an application programming interface that enables software providers to directly access its
awards database, in co-design with stakeholders, is an example of such an improvement.

Exploiting the special features of knowledge
Much knowledge is like a ‘free lunch’ hidden in a vault. By its nature, the consumption of knowledge by one
person has no effect on the capacity of another person to consume it (knowledge is ‘non-rivalrous’).
However, while some generators of knowledge cannot prevent others from copying it for free (for example,
the idea of a smartphone), in many instances, it is feasible to exclude use through contractual provisions likenon-disclosure agreements and intellectual property regulations. Some such commercial protections can bejustified to the extent that they allow a creator to benefit from, and thereby motivate, their inventiveness.
However, such rights can be overly expansive and destructive to the diffusion of ideas. While some of theconcerns relate to diffusion of knowledge that predominantly affects private businesses (like patents), others
have a special significance to government-operated or funded activities (like education and social services)and best practice regulation (such as safety regulations).

Access to publicly-funded research
Much of the academic literature funded by governments in Australia is refereed for free, but hidden behind
paywalls by journal publishers, diminishing the free flow of ideas at the frontier (PC 2016a, pp. 465–471).
This hampers the diffusion (and further creation) of ideas not only to businesses, as discussed in chapter 2,
but also to government-funded service providers like clinicians, and public sector organisations likeuniversities, public hospitals, research agencies and many parts of the public service. While official evidence
about the parties that use academic research is limited to the business sector, it suggests that industries withsignificant government funding are the most common users of this important source of ideas (table 3.2).
Recommendation 5.3 discussed above in this report could therefore have significant benefits for the public
sector, in addition to the potential productivity gains for businesses.

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Innovation and diffusion in government services

Table 3.2 – Select sources of ideas for the Health Care and Social Assistance Industry
Two years ending 30 June 2021a
Relative use
Share ofcompared with

Rank ofentities using

all industries

source among

this source (%)(multiple)

17 industries

Academic conferences

11.7

4.3

1

Universities or other higher education institutions

17.8

3.3

1

Journals, research papers and publications

11.0

2.9

2

Government agencies

13.2

2.4

2

Source of idea/informationa. The Health Care and Social Assistance industry includes a mix of private and not-for-profit organisations that arehighly regulated by governments and that depend significantly on their funding, such as GPs, aged care, and disability
facilities. The table relates to the sources of knowledge that are either directly sourced from the academic literature or
where the sources of ideas are themselves likely to depend on access to that literature. For example, among the 17
industry divisions covered by the ABS Business Characteristics Survey, the number two user of ideas from journals,
research papers and publications was the Health Care and Social Assistance Industry, with about one in five entities inthis industry sourcing ideas from the academic literature, which is a usage rate 2.9 times higher than the all-industries
total. The relevant ABS survey excludes public sector enterprises (like public hospitals, universities, the public service
and public research institutions) that would have a relatively high level of use academic literature. Accordingly, the table
will underestimate the importance of the academic literature to public sector functions.
Source: ABS (Characteristics of Australian Business, 2020-21 financial year, Cat. no. 8158.0).

Fair use
Australia also has weak fair use provisions compared with countries like the United States, again potentiallystymieing knowledge diffusion in activities run or funded by government — universities, schools, libraries —as well as businesses (PC 2016a, pp. 165–198). There are strong grounds to re-visit fair use provisions, anda fair use exception could be developed and implemented in Australia in a way that complies withinternational copyright law (PC 2016a, p. 184).

Standards
Standards are widely seen as a major formal mechanism for the codification and diffusion of practicalknowledge (Blind, Ramel and Rochell 2022; CIE 2006). Standards can enable the dissemination andcoordination of both local and international practices; for example, the Australian Mobile
Telecommunications Association observed that having consistent standards in areas such as wirelessaccess supports investment decisions as they ‘ensure support globally by large and small vendors, global
economies of scale are leveraged… [and] harmonised deployments between market participants’ (AMTA,
sub. 163, p. 8). Moreover, standards are not just relevant to for-profit businesses, with many relating togovernment-owned and funded organisations (like child, disability and aged care, community organisations)and regulation (such as safety and data rights).
Standards are a perfect example of a non-rivalrous good with high public benefits. Recognising this, somestandards are open, as in geospatial data. Many other standards are not. For example, IWA 18 016 is a‘framework for integrated community-based life-long health and care services in aged societies’ and downloading
this from the Standards Australia store costs $260.06. And Master Builders Australia submitted that:In the building and construction industry, the prescription of expensive regulatory texts whichcontain mandatory regulations is made even more frustrating by the practice of referencing a83

5-year Productivity Inquiry: Innovation for the 98% Inquiry report

veritable warren of linked standards which may also need to [be] consulted – and not for free.
(Master Builders Australia, sub. 190, p. 5)
In Australia development of such standards by a not-for-profit entity, Standards Australia, relies on thevoluntary engagement of technical committees comprising government, business, community, academic andconsumer participants.
Despite the public benefits of standards, they are not free to many users, or if so, the ways in which freeaccess can be obtained may not be obvious. This can entail significant costs for activities where many andchanging standards apply. For example, the Australian Competition and Consumer Commission (ACCC)
observed that the National Construction Code references over 100 standards that a building andconstruction business would be required to purchase to understand their legal obligations. It drew a link
between the barriers to compliance arising from the costs of access to standards and the major safetyincidents that arose from the use of non-conforming combustible aluminium cladding (ACCC 2019, p. 3).
Some standards are mandated in legislation, and some are voluntary. Pricing for the mandated standards
risks non-compliance, while pricing for voluntary standards limits the efficient diffusion of knowledge. The
arrangements for licensing and paying for Australian standards has been controversial for many years. In themain, this reflected the pricing strategies of a private business that was given exclusive distribution rights forthe standards by Standard Australia in the early 2000s. That right ceased in late 2018, but many standards
are still sold by Standards Australia to meet its costs.
The ACCC has put forward the view that standards required by legislation should be available at zerocharge, while many organisations formally petitioned Parliament in 2022 to abolish any fees. That standards
should be free for mandatory standards has merit, given the risks of non-compliance and the fact that many
have been developed by government agencies as part of their normal operations. But free or lower-fee
provision of voluntary standards would require funding by the Australian Government (and potentiallyindustry associations), and therefore further consideration of optimal funding models.

Recommendation 5.13
No-cost or low-cost access to ideas that have large public good value
To support the diffusion of best practice and knowledge that has already been generated by innovative
businesses, not-for-profits and government organisations, the Australian Government should:• make mandatory standards freely available and look at new funding models for Standards Australia toreduce or eliminate the pricing of voluntary standards that have high public good value• require open access to research principally funded by governments (see recommendation 5.3 of thisreport for further detail)• reform fair use provisions in intellectual property regulations to adopt a principles-based fair use exception.

84

Appendix

Appendix85

Stylised simulations of economy-wide effects

A. Stylised simulations of
economy-wide effects

Potential productivity benefits of diffusion29
The Productivity Commission used a whole-of-economy model to examine the potential productivity benefitsof better diffusion of new ideas, knowledge, business models, technologies, and management capabilities,
as well as increased data use. The potential benefits were demonstrated in a stylised manner by simulating
scenarios in which all production inputs (labour, capital and intermediate inputs) could be used more
efficiently, such that an industry is able to produce 1% more output using the same inputs. This assumption
was applied in 16 separate simulations across each of 16 broad industries in the model (excluding the‘ownership of dwellings’ industry).
There is a high level of uncertainty in the potential size of productivity improvements arising from therecommendations to improve diffusion in the Australian economy proposed in this report, as well as othermodel assumptions. As such, the 1% productivity improvement has been simulated for illustrative purposes,
so that the simulations can provide insight on how potential productivity improvements could flow through theeconomy’s structure and the differential impacts across the economy. Further details of the model,
simulations and effects of sensitivity testing are contained in this inquiry’s companion volume
Whole-of-economy modelling.
Under each simulation, the improved productivity of the affected industry led to a fall in prices of thatindustry’s outputs relative to the economy-wide consumer price index (CPI), as more output could be
produced per unit of input. This, in turn, increased demand for that industry’s goods from households,
government and the rest of the world. Economy-wide, real GDP increased across all simulations, with thesize of the increase varying from about 0.03% when the productivity effect was applied to the ‘technical,
vocational and tertiary education’ industry, to 0.76% when applied to the ‘construction’ industry (figure A.1).30

29 Referred to as simulation 1 in this inquiry’s companion volume Whole-of-economy modelling.
30

Another way of examining the relative real GDP impacts across simulations is to adjust the economy-wide real GDP effect by
the relative change in output for the simulated industry. In doing so, it was found that the shocks to ‘construction’, ‘technology
and telecommunications’, ‘professional, scientific and technical services’ and ‘other services’ industries led to real GDP effects
that were proportionally larger than changes in the quantity of outputs produced by those industries. While the 'construction’industry effects were likely largely due to its effect on investment and the capital stock (described below), the outputs of theother industries were among those that were most heavily used as intermediate inputs in the production of goods and services.
Therefore, productivity improvements in these industries were better able to flow through to other industries through lowering
their production costs, leading to larger economy-wide real GDP effects.
875-year Productivity Inquiry: Innovation for the 98% Inquiry report

Economy-wide real GDP change (%)

Figure A.1 – Estimated change in real GDP from 16 diffusion simulationsa,b
0.8
0.7

0.6
0.5
0.4
0.3
0.2

0.1
0

Productivity-affected industry

a. Each column represents the economy-wide real GDP change from a separate simulation. b. Industry abbreviations:
AGRICU – agriculture, forestry and fishing; MINING – mining; ADVMAN – advanced manufacturing; OTHMAN – othermanufacturing; CONSTR – construction; TRANWH – transport and wholesale; RETAIL – retail trade; HOSPIT –hospitality; TECTEL – technology and telecommunications; FINSVC – financial services; PRFSVC – professional,
scientific and technical services; SCHOOL – school education; VETUNI – technical, vocational and tertiary education;
HLTHSS – health and social services; PUBADM – public administration; OTHSVC – other services.
Source: Productivity Commission estimates.

The different economy-wide real GDP impacts across different simulations varied based on two aspects ofthe economy’s structure:• the size of the industry experiencing the increased diffusion and resulting 1% productivity improvement —increasing the productivity of industries that were a larger share of the economy led to larger GDP impacts.
– For example, the ‘other services’31 and ‘construction’ industries accounted for relatively large shares of
economic activity (about 13% and 8% of gross value added, respectively) before the simulation, so
simulating a 1% increase in productivity in these industries had larger economy-wide GDP effects in themodel.
– The ‘advanced manufacturing’ industry, while often a focus of government policy attention, accounted
for only 1.5% of gross value added, and as such the economy-wide GDP impact was relatively small
after simulating a 1% productivity increase.
• the extent to which the industry’s outputs were used in investment — increasing the productivity ofindustries that were relatively more used in investment supported the growth of the capital stock and led tocheaper rental costs of capital. This, in turn, enabled all industries that use capital to reduce theirproduction costs.

31 ‘Other services’ include energy and utilities, rental and real estate services, administrative and support services, arts

and recreation, repair and maintenance, and personal services. These services were grouped together for the model
because they were not separately considered to be key industries of interest for the simulation scenarios (companion
volume Whole-of-economy modelling).

88

Stylised simulations of economy-wide effects– The investment sector relied most heavily on ‘construction’ commodities, which constituted close to
60% of the total value of investment before the simulation. Simulating increased productivity in the‘construction’ industry increased the capital stock by 0.9%.
– Non-market services, such as education, ‘public administration’ and ‘health and social services’, were least
directly relevant to the investment sector, and are also produced with relatively little capital. The capital stockincreased by less than 0.1% when productivity improvements in these industries are simulated.
There were also different effects on labour use in productivity-simulated industries. In some industries,
increased productivity led to a fall in labour used by that industry because less labour was required to produce
each unit of output, which more than offset the need for more labour arising from increased demand for goods
and services (due to the aforementioned relative price falls). In other industries, particularly those for which
overseas demand was more responsive to price changes (such as ‘mining’, ‘advanced manufacturing’, ‘othermanufacturing’ and ‘technical, vocational and tertiary education’), the increase in demand for these industries’commodities was large enough to drive an increase in labour used by that industry.
The capital stock increased under all simulations. Although some productivity-simulated industries used lesscapital in production after the productivity shock, this was more than offset by increased demand for capital fromgrowth in other industries, as well as lower relative prices of investment and capital rental in some scenarios.
The overall wellbeing of households (as measured by a combination of how much they consume and how
much leisure they enjoy) increased across all simulations. This was largely due to real wage rates (that is,
wages relative to the economy-wide CPI) rising across all age groups, genders and education levels. Other
than in the simulations that increased productivity in ‘school education’ and ‘health and social services’,
households chose to spend slightly less time on leisure and increased their hours of work (which facilitatedan increase in consumption).
While household wellbeing increased in all simulations, the effects were not enjoyed equally across different
groups. Industries such as ‘retail’ and ‘hospitality’ tended to employ more younger and lower-educatedworkers who had lower wage rates. Productivity improvements in these industries led to these industries
reducing their use of labour. While this labour was absorbed by other industries, overall real wage rate rises
were still smaller for younger and lower-educated workers compared with older and more educated workers,
leading to greater consumption inequality. Conversely, productivity improvements in industries such as‘financial services’ and ‘professional, scientific and technical services’, which tended to employ
higher-earning more educated workers, led to a fall in consumption inequality because real wage rises wererelatively smaller for these workers than for the younger and lower-educated workers who were more likely tobe employed in other industries.
In addition to simulating 16 separate diffusion scenarios across each of the 16 industries in the model, theCommission ran an overall simulation that applied the 1% productivity improvement to all 16 industries atonce. Improving productivity in all 16 industries by 1% in a single simulation led to an increase in real GDP of
about 3.3% and an increase in real gross national income of about 3.5%. These increases were slightly
higher than the combined increases from each separate simulation, due to interaction effects across the
economy. Sensitivity testing found that the real GDP increase ranged from about 1.6 to 4.9% across different
assumed shock sizes, indicating the uncertainty of effects (chapter 4 of this inquiry’s companion volume
Whole-of-economy modelling). The overall improvement in household wellbeing was worth about $1850 perperson per year in 2018-19 dollars, and the benefits were more evenly spread across different individual
groups, leading to a reduction in consumption inequality.

89Abbrreviations

Abbreviations
ABARES

Australian Bureau of Agricultural and Resource Economics and Sciences

ABS

Australian Bureau of Statistics

ABSF

Australian Business Securitisation Fund

ACCC

Australian Competition and Consumer Commission

ACSQHC

Australian Commission on Safety and Quality in Health CareAI

Artificial intelligence

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

ATO

Australian Taxation Office

CBA

Cost-benefit analysis

CPI

Consumer price index

CSIRO

Commonwealth Scientific and Industrial Research Organisation

FDI

Foreign direct investment

GDP

Gross domestic product

IHACPA

Independent Hospital and Aged Care Pricing Authority

MBS

Medicare Benefits Schedule

MSAC

Medical Services Advisory Committee

NAPLAN

National Assessment Program – Literacy and Numeracy

OECD

Organisation for Economic Co-operation and Development

PC

Productivity Commission

RTO

Registered training organisation

SME

Small and medium enterprise

STP

Single Touch Payroll

VET

Vocational education and training

91References

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Report no. 100 – 7 February 2023

5-year Productivity Inquiry:
Managing the climate transition
Inquiry report – volume 6i5-year Productivity Inquiry: Managing the climate transition Inquiry report

The Productivity Commission acknowledges the Traditional Owners ofCountry throughout Australia and their continuing connection to land,
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and Elders past and present.

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ii

Contents

Contents
Prefaceiv

1.

Managing the climate transition

1

2.

Physical impacts

3

3.

Promoting efficient adaptation

5

3.1

Helping to promote informed adaptation decisions

5

3.2

Avoiding policies that discourage private adaptation decisions

7

4.

Productivity-enabling emissions reductions

11

4.1

The implications of Australia’s recent approach to emissions abatement

13

4.2

Foundational elements of Australia’s emissions abatement tool-kit

19

4.3

Reforming Australia’s Safeguard Mechanism

20

4.4

Promoting the integrity of Australia’s offsets arrangements

27

4.5

Distributional considerations

29

4.6

The role of other measures

29

4.7

Public support for research and development

35

Appendix

37

A.

39

Indirect carbon price estimation

Abbreviations

49

References

51

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iii

5-year Productivity Inquiry: Managing the climate transition Inquiry report

Preface
Australia’s contribution to global decarbonisation efforts, and our need to adapt to a changing climate, will
inevitably bring costs, uncertainties and opportunities. Policy settings will be critical for promoting least-cost
pathways and providing the capacity and the flexibility to manage risks and harness opportunities.
Decades of competing approaches to climate policy have left Australia with a hodgepodge of narrowly
applied, sometimes inconsistent sectoral abatement measures that not only impose an unnecessarily highcost on the community but often are ineffective in achieving abatement. Investments in key sectors likeelectricity generation have been delayed and distorted by the lack of clear policy direction.
The economic costs of this approach are increasingly apparent: laying bare the reality that decisions to avoid
technology ‘neutral’ economy-wide abatement mechanisms do not avoid the pricing of emissions — they
only lead to a myriad of very high implicit or ‘shadow’ emissions prices.
Pursuing a least-cost approach to net zero emissions and adapting to a changing climate will be a key
productivity challenge for Australia. With climate-related investments over coming decades to be measured
in the tens and hundreds of billions of dollars, policy settings that distort even a small proportion of thisinvestment will significantly impact our productivity growth performance over the decades ahead.
This volume seeks to identify a path from existing policy settings to a sustainable climate policy architecture
for Australia — that is, one that provides greater certainty, clarity and enduring support for efficientabatement and adaptation decisions over the decades ahead.
This includes progressively recalibrating the Safeguard Mechanism to become Australia’s principal
economy-wide mechanism for achieving national abatement targets. Among other things this will entail
taking steps to strengthen the integrity of recognised emissions offsets, expanding sectoral coverage,
allowing the transfer of emissions rights within and between covered sectors and phasing out otherabatement policies that are not complementary to it.
Efficient adaptation to the effects of climate change will require giving individuals, households andbusinesses the information they need to make decisions in their own interests to adapt to a changing climate
and avoiding policy settings that inadvertently constrain those decisions.

iv

Managing the climate transition

1.

Managing the climate transition

Key points
Climate change looms large over Australia’s productivity performance. Its potential physical impacts,
and the policy steps taken in response, will affect Australia’s productivity growth over coming decades.
• Climate change is expected to directly impact productivity in agriculture, fisheries, tourism and in those
sectors that rely on physical labour in heat-exposed environments.
• Alongside these expected physical impacts, policy efforts to contain the costs of climate change, by both
reducing emissions and by adapting to a changing climate, will also impose costs.
• Climate policies of the world’s major economies risk reducing demand for key Australian exports.
A key productivity challenge will be achieving our 2030 and 2050 emissions reduction targets asefficiently as possible. Continued reliance on a suite of ad hoc sectoral policy measures will
unnecessarily reduce productivity growth and living standards. Economy-wide settings that create
enduring incentives for credible abatement could achieve our emissions targets at lower cost.
The centrepiece of Australia’s abatement policy should be a Safeguard Mechanism (SM) that (i) is
broadened to include the electricity sector at the facility (rather than sector) level and the transport
sector; (ii) includes lower greenhouse gas emission thresholds, to increase the range of facilities
captured by the SM; and (iii) lets facilities earn credits for abatement below their baselines.
Abatement policies outside the Safeguard Mechanism framework should show how they arecomplementary to it and have their implicit carbon abatement costs independently estimated and madepublic. Policies found not to be complementary should be phased out.
Public support for R&D into new technologies stands to be complementary to an expanded SM. But withan economy-wide incentive in place, the case for public support will be strongest in the case of frontier
technologies where market failures are most apparent, though risks will need to be managed.
Improving the integrity of offsets will be needed to achieve real emissions reductions through an
expanded Safeguard Mechanism, including tighter requirements to ensure additionality, permanence
and transparency of abatement projects that generate Australian Carbon Credit Units.
Managing the intermittence challenges of an increasingly renewable electricity grid should move backover time toward relying principally on price movements in wholesale electricity markets to balance
electricity supply and demand. The Capacity Investment Scheme should be subject to a 5-year sunset
clause and would better support supply reliability if technology-neutral.
Adaptation policy should support individual, household and business decisions about what regions, sectors,
and occupations they are best placed to transition into. Governments have a role in helping people makeinformed adaptation decisions and should avoid policy settings that inadvertently constrain them.

1

5-year Productivity Inquiry: Managing the climate transition Inquiry report

Climate change looms large over Australia’s productivity performance over coming decades. Its physicalimpacts, and the international and domestic policy steps taken to limit them, will affect productivity growth.
The physical impacts of climate change stand to be profound (chapter 2) and will directly constrain
productivity growth in sectors that are important to Australia, including agriculture, fisheries, tourism andsectors that rely on the exertion of physical labour in heat-exposed settings (box 2.1).
Alongside these impacts, policy efforts to contain the costs of climate change, either by reducing emissions
or by adapting to a changing climate, will also affect productivity growth. Efficient adaptation measures would
improve productivity growth, relative to what would otherwise be the case, by mitigating the economic
impacts of a changing climate. Some individual emissions abatement measures, such as a distributed
renewable electricity grid that is less exposed to disruptive international energy price volatility, may prove tohave a long-run positive impact on productivity. But abatement measures will generally increase the direct
costs of production and thereby weigh on measured productivity growth. These costs are being incurred aspart of Australia’s contribution to the international effort to reduce the unmitigated economic, environmental
and social costs of climate change, likely benefiting all countries including Australia.
In this way, the productivity impacts of higher production costs can be viewed as the price of reducing thechance of even greater climate-related productivity costs in the future. Global emissions abatement policy
should be viewed as a global cost-minimisation exercise, and sound domestic climate policy should beviewed as a part of Australia’s contribution to that collective effort. Given Australia’s commitment to thiscollective effort, a key policy challenge will be ensuring that the productivity costs of our emissions reduction
actions are kept as low as possible. This will maximise our flexibility as we contend with dynamic climate
challenges over coming decades and will help to increase the likelihood that the benefits we derive fromglobal action to address climate change will outweigh any cost to Australian living standards.

Finding 6.1
Sound climate policy represents a part of Australia’s contribution to global efforts tocontain the long-run costs of climate change
Having committed to achieve net zero greenhouse gas emissions by 2050, and an interim target of 43%
below 2005 emissions levels by 2030, the economic costs of that contribution to global abatement would
be minimised by taking a principles-based, least-cost approach to emissions reductions. This would becomplemented by multilateral oversight of the contributions of other nations.

2Physical impacts

2.

Physical impacts

The average temperature of the Earth has increased by 1.1 degrees celsius since the industrial revolution.
This warming has flowed from an increase in the stock of heat trapping greenhouse gases in theatmosphere, from about 280 parts per million of CO2 prior to the industrial revolution, to 414.4 parts per
million of CO2 in 2021 (CSIRO and BOM 2022, p. 3).
The increase in atmospheric greenhouse gases has come from: the release of geological stores of carbon
due to coal, oil and natural gas combustion; the release of terrestrial stores of carbon (forests, soil, peat)from deforestation for agriculture and human settlements, and the increased production of methane from theagriculture-related increase in ruminant livestock populations; and the anaerobic decomposition of waste.
It is important to distinguish between annual emissions and the stock of greenhouse gases in theatmosphere. The former are flows, the latter are stocks. The lag between a given increase in the stock ofgreenhouse gases in the atmosphere and the subsequent increase in the average global temperature means
that, even if the world achieved net zero emissions tomorrow, an additional 0.3–1.7 degrees of global
warming is estimated to be already ‘locked in’ (Zhou et al. 2021). As a result, Australia will have to prepare
for at least some degree of additional warming, regardless of the speed of global emissions abatement overcoming decades. That is, global emissions abatement will be necessary to avoid the worst effects of global
warming, but it will not avoid warming entirely.
This ‘locked-in’ warming is expected to continue to drive structural shifts in the Earth’s natural resource
systems, which will reduce the availability of some resources, increase the availability of others, and alter
their distribution between and within countries. For example, rising temperatures are projected to:• reduce the availability of land as the melting of land-based ice and the thermal expansion of liquid water
drive sea-level rise
• alter the geographical distribution of rainfall, with some regions experiencing increased rainfall whileothers experience decreased rainfall• alter the temporal distribution of rainfall, with potentially higher peaks in rainfall at particular points in time
• exceed habitable ranges for some plant and animal species, threatening the viability and productivity ofsome crops, and the broader ecosystems that agriculture relies upon
• increase the geographical range of pests and diseases that can harm human agricultural production andproductivity• increase the frequency of days with temperature and humidity levels that are hazardous to human health(‘wet bulb days’)• increase the geographical range of tropical diseases, and threaten to release pathogens frozen in tundra,
to the potential detriment of human and animal health• increase the frequency and severity of bush and forest fires• weaken global ocean currents, which combined with increased ocean acidification and deoxygenation, is
projected to threaten the viability of some marine species.
Some of these physical impacts have already affected Australia and are projected to continue doing so (box 2.1).

35-year Productivity Inquiry: Managing the climate transition Inquiry reportBox 2.1 – Physical climate impacts on key Australian industries
Climate impacts that will be particularly important for Australia include a reduction in agricultural
productivity in some regions, as temperature and humidity levels move beyond habitable ranges forsome crops. For example, Ortiz-Bobea et al. (2021) estimate that global warming has already decreased
global agricultural productivity by 21% since 1961, relative to what would otherwise be the case.
Hochman, Gobbett and Horan (2017) estimate that climate change has reduced Australian wheat yields
by about 27% since 1990, and Hughes et al. (2022) estimate that climate change over the last 20 years
has reduced average Australian farm profits by 23%.
For Australian fisheries, ocean deoxygenation, increases in ocean temperature and increased ocean
acidification are likely to push marine environments beyond the habitable range for some species,
weakening broader ecosystems in the process. CSIRO (2021) estimates that 70% of key species inAustralian fisheries are moderately to highly sensitive to climate change over coming decades.
Ongoing warming also risks degrading Australia’s stock of physical capital. Mallon et al. (2019) assessed
the degree of climate risk (riverine flooding, coastal inundation, bushfire, subsidence and wind risk)
facing 15 million addresses in 544 Australian local government areas between 2020 and 2100, based on
topography, biomass coverage, meteorological patterns and climate projections out to 2100. The authorsclassified 383 300 addresses as high-risk properties and projected that number to increase to 735 654 by
2100, warning that ongoing development … ‘in high hazard areas or continued use of inadequatebuilding standards … will substantially increase this number’ (ibid, p. 5).
Perhaps the most direct way in which Australians will experience the physical impacts of climate change
is through a rise in average daily temperatures, and an associated increase in the number of ‘extremeheat’ days over the course of the year. The number of extreme heat days that occur each year (dayswhere the average daily temperature is in the warmest 1% of days for each month, measured over theperiod 1910 to 2019) has grown from 1 in 1910 to more than 40 in 2019, and is projected to continue
rising as global warming continues (CSIRO 2020, p. 4). Public awareness of the phenomenon of ‘wetbulb days’, where temperature and humidity levels exceed the threshold beyond which the human body
can cool itself, will grow over the decades ahead. Extreme heat has already been responsible for moredeaths in Australia than any other natural hazard. Sectors that have been identified as being particularly
exposed to rising temperatures include those reliant on:• outdoor workers such as construction, agriculture, gardening and landscaping, emergency services,and professional sports• indoor workers exposed to heat-radiating equipment such as manufacturing, laundries, andprofessional kitchens (Humphrys et al 2020).

4

Promoting efficient adaptation

3.

Promoting efficient adaptation

Within the evolving environment, an adaptation policy that seeks to promote productivity growth should focus
on helping individuals, households and businesses make informed adaptation decisions; and avoid policy
settings that inadvertently constrain them.
The vast majority of adaptation-related decisions will be made by individuals, households and businesses in
the natural course of their future planning. Individuals are the primary decision makers about which sectors
they will work in, households are the primary decision makers about which regions they will live in andbusinesses are constantly making judgements about the likely course of consumer preferences and thebusiness environments they will likely face in the future, when choosing which goods and services to
produce and how to produce them.

3.1

Helping to promote informed adaptation decisions

As a trusted provider of information, and important funder of research, governments are well placed to help
inform household and business level adaptation decisions. This is already occurring in a number of helpful
ways. The CSIRO and the Bureau of Meteorology publish a biennial State of the Climate Report that tracks
Australian climate developments and provides updated climate projections every two years. This resource isincluded on the Climate Change in Australia website, which acts as a single source for a wide range ofnational and regional climate projection information and tools designed to help individuals, households,
businesses and governments plan for the decades ahead. Diverse and targeted approaches to thedissemination of climate impact information to households and businesses would be supported throughdevelopments such as smartphone applications to provide site specific climate projections for farmers,
fisheries managers, town planners and other businesses and professions.
The compulsory disclosure of climate risks, particularly where competing interests preclude the voluntaryprovision of such information, may be warranted in some cases. The pre-sale disclosure of theclimate-related exposures of individual residential and commercial properties is a clear candidate. Mandatory
disclosure of the climate-related risks facing a property — such as the likelihood of coastal inundation,
riverine flooding, subsidence, destructive winds, bushfire and other natural disasters — would help potential
buyers of a property make more informed decisions. Such analysis is already available and could be
provided cost-effectively. However, the risk of subsequent reductions in the values of particularly
climate-exposed properties might preclude voluntary disclosure by existing owners, and a general lack ofawareness may prevent potential buyers from seeking it. Compulsory disclosure could also limit the degree
to which government is called upon to become an insurer of last resort for particularly exposed properties,
first by making these exposures clear to potential buyers, and second by helping private insurancecompanies to more accurately price climate risk (box 3.1).

55-year Productivity Inquiry: Managing the climate transition Inquiry reportBox 3.1 – Private insurance markets and climate change
Australian natural disaster-related insurance claims rose notably between 2005 and 2022, from anannual average of $1.5 billion to $3 billion in real terms over the period. Some have partly attributed thisrise to the early effects of climate change. A continuation of this trend would see insurance claim values
quadruple in real terms between 2022 and 2050 (Reinhard and Lefebvre 2022, p. 19).
The Insurance Council of Australia has claimed that ‘at present no region in Australia is uninsurable,
however worsening extreme weather events are driving up premiums in parts of the country most
exposed to extreme weather risk and rendering insurance unaffordable for some’ (ICA 2022). Relativechanges in insurance premiums play an important systemic role in helping households and businesses
understand the climate risks that they face. While rising premiums are undesirable for individual
households and businesses, they will be able to identify when high insurance premiums render unviablea proposed investment (either the addition to an existing structure or development of a new structure), or
more generally reduce an investment’s commercial feasibility.
Increasingly detailed climate projections will be important in helping insurers accurately price climate
risks over the years ahead. An inability to accurately price physical climate risks may lead private
insurers to stop offering insurance products that cover the effects of particular climate events in particularregions altogether, being unable to judge whether they are taking on an acceptable level of risk.
The retreat of private insurers from particular regions or activities will weigh on productivity growth, byremoving one of the mechanisms by which people are able to assess and manage risk, and will leave
governments vulnerable to becoming insurers of last resort for any under-insured activity that remains.
The 1 July 2022 commencement of the Northern Australia Reinsurance Pool risks falling into thiscategory. However, subsequent government interventions in private insurance markets should be
avoided. Subsidising insurance premiums risks distorting investment decisions to the detriment of
productivity growth, and inadvertently encouraging communities to make decisions that can increase thecosts of future climate events.

Recommendation 6.1
Avoid government subsidised insurance schemes
Australian governments should avoid expansion of climate-related insurance sector interventions and set
a medium-term time frame for the phase out of the Northern Australia Reinsurance Pool. Government
interventions in private insurance markets risk subsidising the movement of individuals, households, andbusinesses into harm’s way, and increasing overall adaptation costs. Setting a medium-term time frame
for the phase out of the Northern Australia Reinsurance Pool would provide time for private insurance
providers to secure alternative reinsurance services.

6

Promoting efficient adaptation

3.2

Avoiding policies that discourage private adaptation
decisions

Policy settings that distort private transitions — such that households and businesses transition toward moreclimate-exposed activities — will increase adaptation costs over time. The adverse effects of such policy settings
may be direct or indirect. Direct effect policy settings may prevent individuals and businesses from transitioning
into new activities. For example: unduly restrictive occupational licensing can constrain the movement of labour
between different occupations and sectors (see volume 7); ‘just-transition’ inspired enterprise agreements canconstrain business transitions towards alternative product markets (see volume 7); and foreign investment
constraints can limit the pursuit of new opportunities, while protecting incumbent industries that fail to pursue them(see volume 3). Indirect effect policy settings can include industry assistance and transfer system settings that
impose high effective marginal tax rates on movement between activities. It was partly on these grounds that theCommission previously recommended reforming Australia’s approach to drought assistance (PC 2009).
Economy-wide policy settings, such as household income assistance provided through the transfer system,
are generally preferable to sector-specific transitional assistance. Nevertheless, calls for sector-specificassistance are likely to emerge where climate-affected industries comprise a large proportion of a local orregional economy. In such scenarios, policy makers should guard against providing enduring assistance toincreasingly unviable activities and regions. Doing so risks impeding adaptation-related transitions away fromthose activities and regions, raising long-run adaptation costs, and weighing on productivity growth in theprocess. Assistance that supports productivity is generally neutral across sectors — allowing individuals,
households and businesses to make their own judgements about which sectors, and regions, they are bestplaced to transition into. For this reason, any transitional assistance package provided by governments
should not be made conditional on recipients committing to a particular region, sector or occupation.
Public investments aimed at sheltering incumbent businesses and population centres from climate impacts,
such as building sea walls to defend towns against coastal inundation; investments in irrigation infrastructure
to defend agricultural regions from shifting rainfall patterns; and building or raising dam walls to defend
businesses and households from riverine flooding, can risk locking in higher future adaptation costs. Such
responses are less likely to pass rigorous cost-benefit assessments in at least four scenarios:• where the investment is likely to be insufficient to defend against all relevant climate impacts —this could occur when an industry faces multiple climate-related challenges, but infrastructure investment
is only capable of addressing one of them. For example, investment in increased water supply might help
address growing water availability concerns in some regions, but it may prove ultimately ineffective if
temperature rises in these regions, and an increase in the geographical range of pests and disease, push
the region beyond the habitable range for key crops• where the cost of that investment negates or undermines the comparative advantage of anindustry — when infrastructure investments are capable of addressing all climate-related challenges but
the costs of doing so negate or undermine the comparative advantage that the industry once enjoyed• where the infrastructure investment inadvertently encourages excessive risk taking — building
infrastructure to defend an existing area from climate impacts can encourage excessive risk taking in thearea, potentially negating the overall value of the investment. This might be the case where the building ofdams, or the raising of existing dam walls, to defend a valley from flooding encourages further residential
and commercial development in that valley, raising the expected future cost of remaining flood risk
• where the building of new facilities and population centres in other areas would be morecost-effective — when the infrastructure investments required to defend existing capital exceed the cost7

5-year Productivity Inquiry: Managing the climate transition Inquiry reportof rebuilding this in an area that is less-prone to climate risks. For example, it might be that the costs of
rebuilding part of a town on higher ground (including the transitional and social costs associated with therelocation) are less than the cost of building a system of sea walls to defend an existing coastal town fromrising sea levels. Rigorous cost-benefit analyses that consider the broad range of costs and benefits(including cultural, social and environmental values) of defending existing centres relative to relocating
those centres, can help inform these decisions.
Appropriate risk allocation and the potential for moral hazard will be important considerations for new
development in areas vulnerable to rising sea levels, riverine flooding, bushfire and extreme weather events.
Some of these risks will impact communities periodically, such as riverine flooding, bushfires and extreme
weather events. Others will be more permanent, such as rising sea levels. Whether new developments
should be allowed to go ahead in those areas particularly exposed to future climate impacts is ultimately aquestion of ‘acceptable risk.’ While markets will play a key role in allocating risk efficiently, questions ofacceptable risk, and the social desirability of alternative risk mitigation measures, are often a collective
choice, communicated through democratic processes.
However, a move towards cost-reflective pricing of developments in such areas could help to avoid inadvertently
placing businesses and households in harm’s way. For example, incorporating the cost of risk reduction
measures into the cost of new developments on coastal plains vulnerable to sea level rise (e.g sea walls) could
help to optimise risk management within the development as a whole and ensure that remaining climate risks
were borne knowingly. The approval of defensive infrastructure should be subject to broader social acceptance of
its external costs, such as loss of amenity for neighbouring communities or reduced accessibility to public lands.
Imposing developer levies to fund climate risk reduction measures is one way of moving new developments
towards cost-reflective pricing. Similarly, ensuring that the cost of emergency responses services, like fireservices in bushfire prone area, are incorporated into local council rates would support cost-reflective pricing.
Nevertheless, even with risk mitigation measures in place, climate impacts will still occur. While such risks are
best managed through private insurance markets, it is plausible that private insurers will progressively retreat fromthese markets as climate impact risks increasingly manifest over time (box 3.1). To ensure that Commonwealthand State Governments do not inadvertently and unnecessarily become insurers of last resort, additional developer
levies could be used to finance local funds, designed to cover future shortfalls in private insurance coverage.

Recommendation 6.2
Helping to inform adaptation investment decisions
Households and businesses should be provided with the information they need to make informed
adaptation decisions. State and Territory governments should mandate the pre-sale disclosure of climate
risks for all residential and commercial property sales.
• Such disclosure should be based on existing climate change projections and cover a range of physicalrisks including riverine flooding, sea level rise, subsidence, fire and other natural disasters.
• This disclosure could operate in the same way that States and Territories mandate the pre-saledisclosure of building reports.
For new greenfield developments, the cost of climate risk reduction measures should be incorporated into
the price of buying into the new development, through mechanisms like developer levies, which will help
ensure that future residents face cost-reflective pricing.

8Promoting efficient adaptation

Community relocations and adaptation-related infrastructure
There will likely be cases where least-cost adaptation policy supports the defence of existing developments.
However, the desirability of relocating some particularly climate-exposed communities will be increasingly
debated over coming years. For example, climate change is estimated to increase the severity of rainfall,and subsequent flooding, of particular regions. This reflects the increased ability of the atmosphere to holdmoisture, subsequently released as heavier rainfall, as the atmosphere warms. Communities that werepreviously assessed to be subject to ‘1-in-100-year’ weather events may now be subject to such events on amore frequent basis (Visser et al. 2022). The same will likely be true for communities exposed to bushfire(Canadell et al. 2021), cyclones (Bruyere et al. 2022) and rising sea levels (Hague et al. 2022).
In such regions, automatically rebuilding communities impacted by natural disasters could inadvertently bringa greater level of risk than might be acceptable in greenfield developments, place communities at a greaterlevel of risk than might be commonly appreciated and drive capital misallocation over time, raising long-run
adaptation costs, and weighing on productivity growth in the process. Ensuring that planning approval
processes are updated to incorporate the latest available climate projections will be part of the answer.
Another part will be undertaking cost-benefit analysis that factors in the future likelihood of natural disasters
based on climate projections for the region and that considers the broad range of costs and benefits(cultural, environmental and economic) of rebuilding in-situ with more stringent increased building standards
and community-wide defensive infrastructure, relative to rebuilding in less climate-exposed areas.
As a general principle, if the decision is taken to relocate a community, it is those levels of government
responsible for the initial approval of these developments that should be responsible for the costs of theirrelocation. This will generally be State, Territory and Local Governments, who control land use planning andland registries. Deviations from this principle, such as calls for the Commonwealth Government to fund futurecommunity relocations in situations where the Commonwealth did not have policy responsibility for theestablishment of those communities, risks creating moral hazard issues in State, Territory and Local
Government planning systems. Calls for Commonwealth financial assistance to State Governments are often
justified on the grounds of the greater financial capacity of the Commonwealth. However, questions ofappropriate cost allocation are best resolved by consideration of responsibility for the policy area in question,
not which level of government has the greatest access to financial resources. Moreover, such calls often
overlook the various tax bases available to other levels of government, their ability to access public debt
markets, and existing Commonwealth transfers to other levels of government.

Recommendation 6.3
Transitional assistance should not distort adaptation decisions
If transitional assistance is provided to climate-impacted regions, industries, and workers, it should be
structured in a way that lets people decide which regions, sectors, and occupations they are best placed
to transition into. It should not be made conditional on recipients committing to live or work in a particularregion, sector, or occupation.

95-year Productivity Inquiry: Managing the climate transition Inquiry report

Recommendation 6.4
Cost-benefit analysis for adaptation-related infrastructure projects
Proposed adaptation-related infrastructure projects (including projects to rebuild or relocate communities
impacted by large scale natural disasters) should be subject to rigorous cost-benefit analysis thatincorporates plausible climate projections over the projected life of the asset and compared with that ofalternative options. In the case of community rebuilding proposals, a rigorous cost-benefit analysis would
consider the broad range of costs and benefits – cultural, social, economic, and environmental – ofrebuilding in-situ with increased defensive measures, relative to rebuilding in an alternative location.

10

Productivity-enabling emissions reductions

4.

Productivity-enabling emissions
reductions

The Australian Government has set a national greenhouse gas emissions reduction target of 100% (in net
terms) by 2050, and an interim target of 43% below 2005 emissions levels by 2030. These targets constitute
Australia’s Nationally Determined Contribution to the Paris Agreement, the global treaty that seeks to limit
global warming to 1.5 degrees by the end of the century. The question now facing policy makers is how best
to achieve these targets. Achieving these targets at least-cost will increase the likelihood that emissions
reductions prove a net positive for Australian productivity growth, relative to a world of avoidable climatechange. While acknowledging the uncertainty around technology costs and new technologies, a least-cost
approach to emissions abatement requires pursuing abatement options broadly in line with prevailing
estimates of Australia’s marginal cost of abatement curve — starting with low (or even negative) costabatement options before pursuing higher cost options in later years (figure 4.1).
Figure 4.1 – Australia’s projected marginal cost of abatement curve, 2030
400

Cost of Abatement (A$/tCO2-e)

300
200

Electricity

Land Usea

Agriculture

Industrial

1000Fugitiveb-100

Direct Combustion

-200
-300

Waste

Transport

-400
-500
-600

0

25

50

75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500
Abatement Volume (MtCO2-e)a. ‘Land use’ includes land use change and forestry. b. Fugitive emissions are emissions associated with production ofnatural gas, oil and coal.
Source: Reputex Energy (2019).

Leaving higher cost abatement options to the later years of Australia’s decarbonisation journey would givetime for ongoing technological developments to lower the long end of our emissions abatement cost curve,
reducing the cost of currently high cost abatement options before they are required to be pursued. However,even with ongoing technological gains it might be that some long-run domestic abatement costs remain

115-year Productivity Inquiry: Managing the climate transition Inquiry reporthigher than so-called offsets generated by ‘negative emissions’ technologies (box 4.1), the use of which
would allow for the achievement of net zero emissions even while some gross emission sources remain.

Box 4.1 – The role of ‘offsets’ and negative emissions in a net zero world
Offsets can help businesses, and countries, to achieve ‘net zero’ emissions even when they find it too
costly to eliminate all emissions sources. For example, an individual mining business could achieve net
zero emissions by reducing their (gross) emissions as much as is cost effective (by, say, 70%) and thenpaying another business, say a commercial property fund, to install enough solar panels to ‘offset’ theremaining 30% of the mining company’s gross emissions.
However, this example would not be possible in a country that was operating at net zero emissions. In a
net zero emissions country, both the mining company and the commercial property fund would need toachieve net zero emissions, leaving the commercial property fund unable to produce a legitimate offset.
The mining company could notionally find an overseas commercial property fund to produce an offset,
but this option would be similarly unavailable if the world as a whole was operating at net zero.
In a net zero world the only projects capable of generating genuine offsets would be ‘negative emissions’projects that extract carbon dioxide from the atmosphere. A range of natural processes, such asreforestation and soil carbon projects, are capable of drawing-down carbon dioxide from the atmosphereand storing carbon in biomass and mineralised matter.
There also exist industrial draw-down processes, such as ‘direct air capture’ (DAC) technologies. DAC
involves removing carbon dioxide from the air, typically using industrial fans to concentrate airflow andthen using a solvent or other separation method. Once carbon dioxide has been captured, it can benotionally stored in geological formations deep underground. There are several types of geologicalformation amenable to storage, including: saline formations deep below freshwater aquifers; depleted oiland natural gas reservoirs; coal seams that are uneconomic to extract from; igneous basalt formations,with concentrations of magnesium and calcium’ and organic‑rich shales with similar properties to coal.
Storage is typically made permanent by either a ‘cap rock’ layer that covers the reservoir or saline
formation to prevent leakage, or by relying on chemical reactions between the carbon dioxide and basalt,
coal or shale, to mineralise or absorb the carbon and permanently lock it in the stratum.
While often proposed as an emissions reduction option, these draw-down technologies have also been
identified as a key technology required beyond 2050 — to reduce excess stocks of greenhouse gases in
the atmosphere and thereby reduce the likelihood of the worst effects of climate change (IEA 2020a;
Johansson et al. 2020; van Vuuren et al. 2013). Using these technologies to achieve reductions inatmospheric concentrations of greenhouse gases will require that at least some portion of draw-down
projects are not used as offsets. If used as offsets, the atmospheric carbon dioxide that was drawn down
would simply be replaced by the emissions they were seeking to offset.
Prior to achieving net zero emissions, there will remain a role for a broader range of offsets, not justnegative emissions offsets. The credibility of these offsets will depend on their measurability,
permanence and additionality (discussed further below).

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Productivity-enabling emissions reductions

The credibility of such an approach to achieve our net zero target would depend on the credibility of offsets
used towards the achievement of these goals, which would ultimately turn on the perceived additionality,
measurability and permanence of those offsets, characteristics discussed in greater detail below.
Because many of these abatement opportunities will be best identified and pursued by households andbusinesses, those closest to their own consumption preferences and production processes, it will be
important that Australian climate policy produces enduring abatement incentives across a wide range ofsectors. The broader the range of sectors brought to the national abatement task, the greater the number oflower cost abatement options, and the lower the abatement burden on individual sectors. Carbon pricing
mechanisms that establish a consistent unit price for emissions are generally accepted to be the mostefficient means of generating least-cost abatement across an economy.

Finding 6.2
An efficient abatement path prioritises lower cost abatement options before higher costabatement options are pursued
Setting a long-run emissions target does not mean that all emissions sources need to be reduced at thesame time. Pursuing low-cost abatement options before proceeding to higher cost options provides time forinnovation to reduce the cost of those higher costs options before they need to be pursued. Broad-based
emissions pricing schemes can be an efficient way of ordering abatement actions in this way.

4.1

The implications of Australia’s recent approach toemissions abatement policy

Australia’s political experience with explicit carbon pricing has encouraged Commonwealth, State, andTerritory governments to implement and maintain a suite of alternative sectoral abatement policies —renewable energy targets, feed-in tariffs, energy efficiency trading schemes, public funding of sectoral
abatement projects, tax concessions for domestic biofuel production, and more recently, tax concessions forelectric vehicles, to name a few. While these measures do not place an explicit price on carbon, they all
impose indirect, implicit or ‘shadow’ carbon prices on the Australian economy, many higher than would be
expected to be delivered via an emissions trading scheme (box 4.2). In this way, Australia’s current
approach to achieving our emissions reduction targets is coming at a higher overall cost than is necessary.
Some of these higher costs can result from a ‘charismatic abatement’ problem where more government
support is provided to more ‘visible’, but higher cost, abatement technologies than the less visible, but morecost-effective, options that would be elicited by an emissions trading scheme (box 4.3). This charismaticabatement problem might help explain the high levels of government support provided to home solar panel
installation during the late 2000s, and the high levels of government support being provided to electricvehicles today, despite these being some of the highest cost abatement options available (box 4.2, 4.4).

13

5-year Productivity Inquiry: Managing the climate transition Inquiry reportBox 4.2 – Indirect carbon prices in Australia, selected policies
Australia’s political experience with explicit carbon pricing has encouraged Commonwealth, State andTerritory Governments to implement a range of alternative policies to address emissions. These
alternative policies impose a wide range of indirect carbon prices on the Australian economy, some manytimes higher than what would be expected to emerge from economy-wide explicit carbon pricing that
achieved the same amount of abatement.
Level of Government

Policy$ per tonne of CO2-e a,b

Commonwealth

Exemption of EVs from fringe benefits tax$987 – 20 084 c($905 – 13 580)

Renewable energy target — Small-scale$57 – 209 dtechnology certificates
Renewable energy target — Large-scale$60 – 220 dgeneration certificates
Emissions Reduction Fund (ACCUs)

New South Wales— Average fixed-delivery pricee$12 – 59 g

— Spot pricef$29 – 144 g

Discounted excise for E10h$128 – 274 i

Discounted excise for B20h

$135 – 152 i

Energy savings certificatesj$41 in range $32 – 59

$3000 EV subsidy and stamp duty exemption$271 –4914 c($222 – 3323)

Victoria

Victorian energy efficiency certificatesk$69$3000 EV subsidy and registration discount$287 – 4807 c($217 – 3250)

Queensland

Tasmania$3000 EV subsidy, stamp duty discount,$282 – 4933 c

registration discount($222 – 3335)

EV stamp duty exemption$134 – 2137 c($96 – 1445)

South Australia$3000 EV subsidy and registration exemption for$209 – 3647 cthree years($164 – 2466)

a. Estimates have been rounded to the nearest dollar. b. Bracketed prices reflect incorporation of 100% renewable energy
assumption, provided for sensitivity analysis. Given the opportunity cost of using renewable energy for EV charging, theunbracketed prices are arguably more relevant. c. For simplicity, this estimate reflects fiscal costs per tonne of abatement,
not the broader economic cost per tonne of abatement. The latter would also incorporate the impact of reduced taxation on
the economy provided by tax concessions. Some of these differ from the preliminary estimates provided in the interim
report, reflecting greater consideration of abatement generated by EVs once in the secondary market, and a slightly
narrower range of additionality assumptions (75% to 5%). The high level of estimates for demand-side EV policies reflect
their generosity relative to their abatement benefits, while the notable range in prices reflects a spectrum of additionality
and bring-forward assumptions ahead of assumed mainstreaming of EVs in new car sales by 2035. See appendix A for
further details on the estimation approach. d. The range presented reflects three different emissions intensity factors as

14

Productivity-enabling emissions reductions

Box 4.2 – Indirect carbon prices in Australia, selected policies
well as additionality ranging from 50–100% (appendix A) e. The most relevant ACCU price for the Emissions Reduction
Fund — the biggest buyer of ACCUs — is the average fixed delivery contract price, which is $11.70. f. The spot ACCU
price might be more relevant for offset sellers and private buyers and was equal to $28.75 on 5 September 2022. g. The
upper bound estimate accounts for additionality concerns relating to common emissions reduction methods. Macintosh,
Butler and Evans (2022) suggest that up to 80% of credits issued under three of the ERF’s most popular methods (which
account for about 75% of total credits issued) do not represent genuine emissions cuts that would not have happened
otherwise. h. The discounted rate of excise only applies to domestically produced ethanol and biodiesel. i. Lower boundestimate considers only scope 1 greenhouse gas emissions. Upper bound estimate considers lifecycle emissions and isconsistent with PC (2011). The excise rates used are those that were in place prior to the reduction that took place on
30 March 2022. j. The certificate price used is the penalty rate, which should represent an upper bound, though the spot
price sometimes exceeds the penalty rate. A range is calculated using the emissions intensity of Australian coal generation
as a lower bound, the average emissions intensity of electricity generation in New South Wales in 2019-20 as a central
estimate and the emissions intensity of gas generation as an upper bound. k. The price listed is the spot price, which islikely higher than the price involved in long-term contracts.
Sources: Chalmers (2022); Demand Manager (2022) NSW Government (2022); DELWP (2021); Queensland
Government (2022a, 2022b, 2022c); TCCO (2021); Department of Treasury and Finance (2022); Department forEnergy and Mining (2022); Government of South Australia (2021); DWER (2021); Fisk (2021).

In addition, a less visible approach to climate policy risks exposing Australian industry to additional carbon
pricing overseas. This possibility is apparent in the emerging design of the European Union’s (EU’s) Carbon
Border Adjustment Mechanism (CBAM), which is planned to be progressively implemented between 2023
and 2026. The EU CBAM aims to impose carbon prices on imports of particular goods that are broadly
comparable to those faced by EU producers. The stated intent of the policy is to level the playing field
between domestic and foreign producers competing with one another in the EU market, taking into
consideration carbon prices already paid by foreign producers in home countries.
However, it appears that the EU might only recognise direct carbon prices faced by foreign producers, not
the range of indirect carbon prices currently imposed on the Australian economy. While the impact of the EU
CBAM on Australia is likely to be limited, those impacts will grow if it applies to a wider range of imports overtime, and if the EU example is followed by other major economies. In this way, Australia’s current approach
to climate policy risks exposing our economy to a double cost — the first through a range of indirect carbon
prices that may be higher than available alternatives, and the second through the subsequent imposition of
direct carbon prices on our exports.1
Consistent and enduring incentives to reduce emissions across the economy are needed
Australia’s current suite of domestic policies, along with the longer standing emissions abatement policies ofthe major economies, and the global technological developments they have supported, have started toshape Australia’s future decarbonisation path. The uptake of renewable energy is projected to rapidly
decarbonise our electricity system over the next decade,2 in turn supporting the decarbonisation of transport

1 While the EU CBAM might recognise carbon prices imposed on facilities captured by the Safeguard Mechanism(discussed below), the fact that the Safeguard Mechanism only applies a carbon price to those facility emissions that are
above that facilities baseline, and provides free emissions allowances for all emissions below the facility baseline, meansthat Australian exporters captured by the CBAM might only receive a partial discount on CBAM liabilities.
2 AEMO’s 2022 Integrated System Plan (ISP) projects several scenarios for Australia’s electricity system between now and
2050. Under the scenario considered ‘most likely’ renewables and storage are projected to account for 86% of Australia’s
energy in 2030-31, 95% in 2040-41 and 97% in 2050-51, with the remainder made up of peaking gas (AEMO 2022).
15

5-year Productivity Inquiry: Managing the climate transition Inquiry reportthrough electric vehicle uptake, and the production of ‘green hydrogen.’ In time, ‘green hydrogen’ might also
support the decarbonisation of some parts of heavy industry and transport, though its most efficient
applications are likely to be revealed in time. Remaining ‘hard-to-abate’ sectors such as livestock might beoffset through the uptake of negative emissions technologies, though ongoing technological development
and shifting consumer preferences might ultimately reduce the need.
While most of these technological developments are being driven by international policy settings, which will
naturally accrue to net technology importers like Australia, a domestic policy architecture that creates
enduring incentives to pursue emissions reductions across the economy will be important in driving theirefficient domestic application. Moreover, creating enduring abatement incentives may become increasingly
important as the global move away from fossil fuels leads to structural declines in the price of coal, oil andgas — a development that might otherwise encourage their increased use in Australia, at the potential
expense of longer-run emissions reduction objectives.

Box 4.3 – Why economy-wide pricing mechanisms deliver least-cost abatement
All policy interventions aimed at generating emissions abatement impose carbon prices on the economy.
However, in many instances, these prices are hidden (so-called ‘shadow’, ‘implicit’ or ‘indirect’ carbon prices)
and apply only to a narrow set of actions. The narrow coverage of many interventions allows other emissions
source to expand, reducing their overall effectiveness. Moreover, piecemeal interventions that target particularsources of emissions, or that promote the application of particular technologies lead to a greater range ofabatement ‘prices’ across the economy, driving higher cost abatement than is necessary to achieve near-termemissions reduction goals. Piecemeal interventions can also overlap with other piecemeal measures,
unnecessarily increasing the economy-wide cost of abatement in the process.
The application of a consistent carbon price across a broad range of sectors, whether implemented bycarbon taxes or cap-and-trade schemes, reduces the economy-wide cost of abatement (or enables
greater abatement for the same total cost) for several reasons. First, by allowing the concentration ofabatement efforts in the most cost-effective options available and thereby transferring remaining
emissions rights to those sectors that generate the greatest value-add from their use. Second, theapplication of a consistent price across a broad range of sectors reduces the scope for avoidance or‘leakage’ into what would otherwise be uncovered sectors. More generally, an explicit price is also more
observable and can be more readily factored into production and investment decisions.
Because businesses can be expected to pass on these increased costs to the consumers of their goods
and services, emissions trading schemes provide a means of internalising the externalities associatedwith consumer choices. This move to more cost-reflective pricing will likely drive consumers towards lessemissions-intensive goods and services, on price grounds alone, further reducing the emissions-intensityof economies with broad-coverage emissions trading schemes.
Linking a domestic emissions trading scheme with that of other countries, either by allowing for thetransfer of emissions permits between the two countries or by allowing the importation of offsets fromother countries, can establish the international price of permits as the upper bound for domestic permit
prices. Doing so further lowers domestic abatement costs to the extent that the permits are credible, andthat the international price is generally lower than the domestic permit price.

16

Productivity-enabling emissions reductions

Box 4.4 – Case study: Why demand-side Electric Vehicle (EV) policies are an
inefficient way to reduce emissions
In the absence of mechanisms that directly price emissions, governments have implemented various
measures to encourage the uptake of low-emissions technologies such as EVs. While EVs stand to makean important contribution to Australia’s decarbonisation, a key policy question is whether demand
subsidies to expedite their uptake represent an efficient and effective means of achieving additional
abatement, or whether alternative approaches might prove more desirable.
EVs will reduce emissions by leveraging the decarbonisation of our electricity system to reduce Australia’s
consumption of liquid fossil fuels. EV uptake might also reinforce the decarbonisation of the electricity gridby providing for a growing stock of second-hand EV batteries that could be reused to stabilise anincreasingly renewable electricity grid. More generally, the transition to EVs stands to improve healthoutcomes associated with local air quality and improve energy security by reducing vulnerability tointernational oil supply disruptions.
The transition from internal combustion energy (ICE) powered cars to EVs is already underway in Australia,
where the number of new car sales that are Battery Electric Vehicles (BEVs) or Plug-In Hybrid Electric Vehicles(PHEVs) has risen from less than 50 in 2011 to almost 40 000 in 2022 (figure below). While only 3.8% of total
new car sales in Australia in 2022, the accelerating demand for EVs apparent since 2020 appears consistent
with EVs reaching the second phase of the four-phase ‘product lifecycle.’ The four-phase product lifecycle
comprises a preliminary ‘market development’ phase where a product is largely unproven and sales are low, asecond ‘market growth’ phase where demand accelerates as the new product gains broad-based acceptance,a third ‘market maturity’ phase where demand largely grows in line with that of the overall market and a final‘market decline’ stage where the product is superseded by a new technology.
New electric vehicle sales in Australia, by type and year
45000
40000
35000
30000

25000
20000
15000
10000
5000
0
2011

2012

2013

2014

2015

Battery Electric Vehicles

2016

2017

2018

2019

2020

2021

2022

Plug-in Hybrid Electric Vehicles

Sources: EV Council (2022); FCAI (2023).

Moving from the ‘market growth’ phase of the product lifecycle to the third ‘market maturity’ phase, might beparticularly apparent from 2035 as many of the world’s major car makers switch to majority share (or even100%) EV production, driven by EV-only new car sale mandates in many of the world’s major car markets —the European Union, Japan, California, and the 16 States that reference Californian vehicle standards

17

5-year Productivity Inquiry: Managing the climate transition Inquiry reportBox 4.4 – Case study: Why demand-side Electric Vehicle (EV) policies are an
inefficient way to reduce emissions(IEA 2022). As a net transport technology importer, it seems likely that any broad-based global transition
towards EV production will naturally translate to broad-based Australian EV uptake along a similar timeline.
With EVs appearing to have reached the second phase of the product lifecycle, the principal constraints totheir broader uptake before 2035 will be supply, not demand. Indeed, reports of extended waiting times for
EVs are commonplace in Australia. With supply the principal constraint for EV uptake in Australia, policy
efforts to increase the demand for EVs, such as tax concessions and rebates for EV purchases, run therisk of simply adding more people to the proverbial queue, subsidising people who are already in thequeue, or in the case of tax concessions that are selectively available to some groups, simply pushingthose selected groups to the front of the queue — all for no appreciable gain to the overall number of EVs
on Australian roads, relative to what would have otherwise been the case.
This basic dynamic contributes to the high indirect carbon prices that are commonly estimated for
demand-side EV policy measures. However, even if we assume that demand-side policies were capableof driving largely commensurate increases in EV purchases, brought forward from 2035 to today, theywould still constitute a relatively expensive emissions abatement policy (box 4.2). Limited near-termemissions abatement available from switching from a petrol-powered vehicle to an emissions-intensive
electricity grid powered EV plays a part. However, even if we were to assume that an EV was charged byemissions-free renewable energy that was incapable of being used for alternative purposes (and therefore
constituted truly additional renewable energy capacity), the estimated indirect carbon price of thesemeasures would only fall by between 8 and 33% (depending on the measure), remaining amongst themost expensive option for emissions abatement.
These findings are broadly consistent with a range of studies and publications that have noted therelatively high cost of demand-side EV measures, or have questioned the value of demand-side EV
measures more generally.a
The high cost of demand-side EV subsidies ultimately reflects the underlying generosity of the subsidies ofsuch programs relative to each tonne of abatement potentially available from passenger vehicles. In
Australia, this is particularly apparent in the case of the recently legislated exemption of some EVs from
Fringe Benefits Tax (FBT), relative to the more modest, though still potentially high cost of abatement,
state-level subsidies. Factoring in more conservative assumptions about the likely additionality and degreeof bring-forward of those additional purchases, and the emissions intensity of the power source for EVs,
simply increases the indirect carbon cost of these policies. While this analysis does not make assumptions
about the likely bring-forward or additionality of EV purchases under these policies, it does make apparent
the indirect carbon price implications of low additionality, and the degree of bring-forward of any additional
EV purchases. The lower the assumed additionality, and the greater any bring-forward, the greater thecost per tonne of abatement (see appendix for further discussion of estimation approach).
Demand-side EV measures can also raise equity concerns when the chosen policy instrument isdisproportionately relevant to higher income cohorts. This might be relevant to the FBT exemption for someEVs, to the extent that FBT is disproportionately relevant to higher income households. More generally, thepurpose of the FBT system is to protect the integrity of the personal income tax system, dissuading higher
income individuals from attempting to avoid personal income tax liabilities by taking a share of their incomein the form of goods and services. Using the FBT system for alternative policy goals like attempting to drive
EV uptake risks compromising the degree to which the FBT system protects the integrity of the personal
income tax system, potentially reinforcing equity concerns in the process.

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Productivity-enabling emissions reductions

Box 4.4 – Case study: Why demand-side Electric Vehicle (EV) policies are an
inefficient way to reduce emissions
Given that the principal constraint to the uptake of EVs in Australia is supply, due to both limited global
production and the prioritisation of that limited supply to other car markets around the world, a more
efficient approach to supporting EV uptake would be to take available steps to increase EV supply inAustralia. This could include increasing fuel efficiency standards in Australia, which could potentially lead
global EV producers to prioritise a greater share of global EV production to the Australian market (Martin,
2022). With appropriate protections, liberalising the importation of second-hand EVs into the Australianmarket would also open an alternative channel for EVs to enter the Australian market.
a. See for example Camara, Holtsmark and Misch (2021), Fournel (2022), Nunes, Woodley and Rossetti (2022), andFreebairn (2022).

4.2

Foundational elements of Australia’s emissions
abatement tool-kit

There are three components of Australia’s framework for emissions abatement that are well placed to berecalibrated to form an economy-wide abatement mechanism over time:• the Safeguard Mechanism — the policy tool that requires Australia’s largest greenhouse gas emitters tokeep their emissions below an emissions limit (a baseline)• Australian Carbon Credit Unit offsets (ACCUs) — a tradeable financial product awarded to eligible
projects that reduce greenhouse gas emissions• the Emissions Reduction Fund — a Commonwealth government fund that purchases ACCUs, thereby
indirectly funding emissions abatement activities that help to reduce Australia’s emissions.
Australia’s Emissions Reduction Fund (ERF) and Safeguard Mechanism (SM) began operation in 2016. The
ERF was developed to contribute to the achievement of Australia’s emissions reduction goals by providing amechanism by which the Australian government can purchase emissions abatement from eligible abatement
projects. Projects that generate abatement in accordance with methodologies recognised by Australia’s
Clean Energy Regulator (CER) can earn Australian Carbon Credit Units (ACCUs), which are eligible to bepurchased by the ERF.
The biggest buyer of ACCUs is currently the Australian Government, through the ERF. However, a growing
source of demand is from industrial facilities captured by the Safeguard Mechanism (SM). The SM wasdeveloped to protect against the possibility that the emissions abatement purchased by the ERF was not
simply counteracted by an increase in emissions from industrial facilities. It attempts to do so by giving‘baselines’ — effectively emissions budgets — to greenhouse gas producing facilities captured by the SM.
These emissions budgets can be met either by pursuing internal emissions reductions at the facility, or bypurchasing enough ACCUs to bring net emissions into line with facility baselines.
The SM does not have pre-defined sectoral coverage per se: it applies to all facilities that produce 100 000
tonnes of CO2-e per annum, spanning a number of sectors. Facilities covered by the SM operate in mining,
oil and gas, manufacturing, construction, waste and some transport sub-sectors (large rail companies anddomestic airlines). The electricity sector is notionally included in the SM but is treated differently than othersectors (see detail below). The baselines that apply to these facilities have been set in several ways over thelife of the SM, but are currently set in emissions intensity (that is emissions per unit of output) terms, not19

5-year Productivity Inquiry: Managing the climate transition Inquiry reportabsolute emissions terms. Most of these baselines are non-binding as they are above current facility
emissions. The most notable example is the electricity sector, which has a baseline above the sector’saggregate emissions. Given the rapid decarbonisation of the electricity grid currently underway, it is likelythat the current sectoral baseline will never become binding on the electricity sector.
A number of arrangements exist that have limited the degree to which the baselines are binding in any given
year, including: allowing facilities to average out their emissions over several years; allowing for exemption
from baselines in the case of ‘exceptional circumstances’; and, in some cases, allowing facilities to apply for
new baselines if their existing baselines are exceeded. In addition, the SM does not prevent new facilities
from being built in these sectors. These arrangements mean that overall emissions can increase in sectors
covered by the SM. Indeed, since the beginning of the SM, emissions from covered sectors have grown by
7% from 2005 levels, and have been projected to be 17% higher than 2005 levels by 2030 if the current
scheme design is maintained (Reputex 2021). As the central policy tool for emissions abatement policy,
ensuring that the SM’s emissions baselines remain consistent with Australia’s abatement goals will requireongoing adjustments to SM baselines over time.

4.3

Reforming Australia’s Safeguard Mechanism

Recognition of these features, combined with an increase in Australia’s 2030 emissions reduction target, has
led the Australian Government to consider reforms to the SM that might better position it to contribute to theachievement of Australia’s emissions reduction goals. While Government has announced its intention toretain many of the basic features of the existing SM, such as maintaining the schemes existing sectoral
coverage, facility thresholds and emissions intensity baselines, the Review’s discussion of the SM and its
subsequent recommendations are offered in the possibility that the scheme will continue to evolve over time,perhaps following the next scheduled review of SM policy settings in 2026-27 (DCCEEW 2023).
Reforms to the SM could help move Australia towards a lower-cost approach to achieving its 2030 and 2050
emissions abatement goals, helping to safeguard productivity growth in the process. Implemented together, thebroadening of the SM to include a greater range of facilities (by sector and facility-size), moving from emissions
intensity (‘production-adjusted’) baselines to absolute emissions (‘fixed’) baselines, allowing for the generation of
sub-baseline credits (credits granted to SM facilities that achieve emissions abatement below their baselines) andnot providing additional assistance through the SM to emissions intensive trade-exposed entities (EITEIs), would
increase the efficiency and equity of the scheme, reduce its complexity and better position the SM to contribute toAustralia’s economy-wide abatement task. The degree to which the SM credibly and efficiently contributes to theachievement of Australia’s emissions abatement goals will also depend on the integrity of the Australian Carbon
Credit Unit (ACCU) offsets recognised by the scheme (more below).

Moving from emissions intensity baselines to absolute emissions
baselines
The Safeguard Mechanism effectively imposes emissions budgets on the facilities that it applies to. Thesebudgets are expressed as ‘baselines’ and are defined in emissions intensity terms, not absolute emissions terms.
Emissions intensity refers to emissions per unit of output while absolute emissions are total emissions from thefacility. While they often tend to move together, they can diverge depending on what happens to output levels. For
example, lower emissions intensity need not translate to lower aggregate emissions when output rises.
The SM’s current use of emissions intensity baselines (‘production-adjusted’ baselines in the language of theSM) has been argued to have a lower economic impact on individual facilities than absolute emissions

20

Productivity-enabling emissions reductions

baselines (‘fixed’ baselines in the language of the SM) in so far as it allows captured facilities to increase
production without exceeding their baselines, and precludes facilities from using production cuts to stay
below their baselines. By doing so, the argument goes, an emissions intensity baseline minimises the overall
impacts of the policy on production levels, thereby reducing the economic impacts of emissions constraints.
However, the strength of this argument diminishes once a country decides to pursue an absolute emissions
reduction goal. Given that Australia has a nationwide emissions reduction target, the ability for SM-covered
sectors to increase their overall emissions either imposes greater absolute abatement burdens on sectors
not covered by the mechanism, or undermines achievement of the overall emissions target. Emissions
intensity baselines may also raise overall abatement costs by not creating an incentive for businesses withmultiple facilities to reduce output in their more emissions intensive facilities, and increasing their output intheir less emissions intensive facilities. More fundamentally, it is incorrect to suggest that absolute emissions
baselines prevent individual businesses and sectors from expanding output. Doing so would simply require
facilities wishing to compete with other emissions generating facilities for the right to do so, contributing to
the efficient allocation of increasingly scarce emissions rights in the process.
In addition, using emissions intensity baselines to target an aggregate emissions reduction target could
complicate medium-to-long term investment planning. While an individual facility may know that Australia has
a 2030 and a 2050 emissions reduction target, it may be less clear what that means for the facility’semissions intensity baseline over coming decades. Facility owners would not only need to form a view onwhat those aggregate emissions reduction pathways would mean for facility level baselines but would haveto make long-run output estimates to assess what abatement options they would need to pursue in order tomeet those future baselines. They would have to do this over a period in which consumption and production
patterns will likely be changing as Australia enters a more carbon constrained world.
The shortcomings of emissions intensity baselines have been recognised for some time now. The
2008 Garnaut Review noted that a system with emissions intensity baselines ‘introduced a high andunavoidable degree of arbitrariness’ into the design of emissions reduction policy and would ‘raisetransaction costs and encourage rent-seeking behaviour’ (Garnaut 2008).
Transitioning the SM to operate on the basis of absolute emissions baselines would avoid these issues. It
would increase the transparency and predictability of periodic adjustments to SM baselines, providing asomewhat clearer road ahead for SM facilities, abatement technology providers, offset producers inuncovered sectors, and investors more generally. The move to absolute emissions baselines would also
reduce the administrative burden of the system by avoiding the need to report production levels alongside
emissions levels and removing the need for facilities to provide third party audited production projections for
new and significantly expanded facilities. Increased transparency around any periodic resetting of facility
baselines would also promote integrity and public confidence in the process.
Should crediting of sub-baseline abatement be allowed (more below), an absolute emissions baseline could
also act as a transitional assistance mechanism for covered facilities. This is because an absolute emissions
baseline would allow facilities to achieve sub-baseline emissions by reducing output, regardless of thereason for that reduction of output. If a facility was closed down, and the associated sub-baseline abatement
was eligible to generate credits, the sale of those credits would provide a form of exit payment for the ownersof the closed facility. This would not be possible under a system of emissions intensity baselines.

Sub-baseline-abatement should be creditable
Under the current design of the SM, captured facilities need only prevent their emissions from rising beyond
their baseline, either by pursuing internal abatement options, or by purchasing a sufficient number ofAustralian Carbon Credit Unit (ACCU) offsets. This presents something of an asymmetry for facilities, in that21

5-year Productivity Inquiry: Managing the climate transition Inquiry reportfacilities are required to purchase ACCUs for any emissions that exceed their baseline, but cannot earncredits for any emissions abatement below their baseline. Providing symmetry in the SM would increase theefficiency of abatement by increasing the pool of commercially viable abatement opportunities and allowing
the transfer of economy-wide abatement burdens to the least-cost abatement options within the SM, likely
reducing economy-wide abatement costs, and safeguarding productivity growth in the process.
Sub-baseline crediting would sit most comfortably within a system of absolute emissions baselines. A SM
that imposed emissions intensity baselines, while allowing those facilities to generate sub-baseline credits
denominated in absolute emissions terms, would risk allowing SM facilities to generate sub-baseline credits
while increasing their overall emissions. This could occur when a SM facility increased output in such a way
as to fall below their emissions baseline while still increasing overall facility emissions. This might occur if
output was increased in a less emissions-intensive way than average production. If this was undertaken byenough facilities it would be possible for total SM facility emissions to fall short of the absolute emissions
reduction task asked of it, in turn imposing greater abatement burdens on non-SM emissions sources, or
requiring a future ‘catch-up’ recalibration of SM facility baselines, presenting a source of uncertainty for all
emissions generating entities in the process. Policy back-stops to limit this possibility, such as building anemissions buffer or reserve into the SM, would likely add to the overall abatement costs of the mechanism.
As set out above, if sub-baseline crediting were coupled with absolute emissions baselines it would also
provide some degree of automatic transitional assistance for facilities that choose to markedly reduce theirproduction in the presence of carbon constraints. The resulting reduction in emissions would generatecredits that could be sold to facilities operating beyond their emissions baseline. This feature would not bepresent in the case of an emissions intensity baseline, given that output reductions cannot impact theemissions intensity of a facilities output. Neither would it be present in the case of an absolute emissions
baseline that did not allow sub-baseline crediting.
These observations should not be taken as presenting a public policy case for industry assistance to SM
facilities, but a simple drawing out of foreseeable interactions between possible SM design features. Futurecarbon constraints have been part of Australian policy discourse for several decades, and emissions
abatement policy has been in place for much of this time. The case for transitional assistance is strongest
when industries are acutely impacted by unforeseen developments, and where those impacts risk producing
broader costs for society. Entry into long anticipated, and progressively implemented, carbon constraints
does not appear to have these features. Nevertheless, were governments pre-disposed to providing
transitional assistance to industry, the combination of sub-baseline crediting and absolute emissions
baselines may be judged sufficient to do so, reducing further calls on limited fiscal capacity.

Expanding sector coverage
The sectoral coverage of the Safeguard Mechanism is currently limited. This is particularly apparent in its
treatment of the electricity sector and its omission of much of the transport sector. Broadening the coverageof the SM would move Australia towards a lower cost approach to emissions reductions.

Electricity sector
As noted above, the electricity sector is notionally included in the SM. However, it is treated differently thanother sectors. While facilities in other sectors are captured by the SM once they emit 100 000 tonnes or moreof CO2-e per annum, in the electricity sector the SM baseline only applies to the sector as a whole, and iscurrently set at 198 million tonnes of CO2-e per annum. That is, the individual electricity generators thatcomprise the sector do not currently face facility level baselines. Under its current design, it is only once thesector wide baseline is breached that the SM will impose facility level baselines on individual power stations.

22

Productivity-enabling emissions reductions

However, the steady decarbonisation of the electricity sector underway will likely preclude the sector widebaseline from being breached.
The current treatment of the electricity sector has been justified on the basis that ‘the electricity sector
behaves more like a single entity, where the output produced is centrally coordinated to meet demand in realtime’ (CER 2022). However, this characterisation overlooks the notable difference in emissions intensities ofthe electricity generators that compete with one another in Australia’s electricity markets. Failing to accountfor these emissions differentials within the SM reduces the extent to which low emissions electricity sources
can compete with high emissions electricity sources, relative to what would otherwise be the case.
Facility level coverage of individual electricity generators would move Australia towards a lower costabatement path. It would do so by bringing a greater pool of potential abatement options to the SM’s overall
abatement task. These benefits would be compounded by allowing for sub-baseline crediting, which would
enable the transfer of scarce emissions rights from those facilities that are readily able to reduce emissions,to those that are less able to do so. The incorporation of the electricity sector into the SM would also reduce
the policy case for additional sectoral interventions that can add to the cost of Australian emissions
reductions (discussed further below). Finally, facility level coverage of electricity generators would promoteenduring abatement incentives for the sector, which could prove important in constraining any future reboundin electricity sector emissions were coal and natural gas prices to undergo structural declines as the world
progressively decarbonises. Failing a move to facility level coverage, a reduction in the sectoral baseline
would remove existing headroom above current sectoral emissions, thereby helping to limit any future
rebound in electricity sector emissions. However, this would not be as efficient as facility level coverage
because it would not allow for the transfer of emissions rights between sectors and would not efficiently priceemissions differentials between competing generation technologies.
The inclusion of a rapidly decarbonising electricity sector in the SM might prompt concerns about markedly
reducing abatement burdens on existing SM facilities. However, given that the SM imposes baselines on all
captured facilities, and that these baselines are proposed to be collectively calibrated to Australia’s overallnational emissions reduction goals, there is little reason to expect this to occur. That is, industrial facilities
would continue to face their own individual baselines if electricity generators are included or excluded fromthe SM. Moreover, given that Australia has set itself the goal of achieving net zero emissions by 2050, within
one lifecycle of a 30-year industrial facility, the abatement incentives facing industrial facilities would
ultimately be determined by the credibility of Australia’s 2050 net zero emissions target.

Transport sector
Given its focus on emissions directly produced by facilities (‘Scope 1 emissions’) that produce more than
100 000 tonnes of CO2-e per annum, the SM currently applies to only some elements of the transport sector,
such as large rail companies and domestic airlines. But as it is individual cars, buses and trucks that produce
Scope 1 emissions in the ground transport sector, all of which individually fall below the 100 000 tonne
threshold, the ground transport sector is effectively uncovered by the SM.
Yet transport emissions are a substantial, and growing, source of Australian emissions, increasing from lessthan 10% of Australian emissions in 1990 to 18.6% in 2021. All else equal, expanding the Safeguard
Mechanism to include the transport sector, by imputing all downstream Scope 1 emissions from vehicles to
upstream fuel wholesalers, would reduce the economy-wide cost of emissions abatement.
Were electricity generators included at facility level in the SM, inclusion of fuel wholesalers would also
restore the transport technology neutrality of the SM — being imposed on the electricity used to powerelectric vehicles, and the liquid fuels used to power conventional internal combustion engine vehicles. In

235-year Productivity Inquiry: Managing the climate transition Inquiry report

addition, the extension of the SM to fuel wholesalers would further reduce the already limited policy case forthe high shadow carbon price policy measures aimed at promoting electric vehicle uptake (box 4.3).

Lowering facility thresholds
The Safeguard Mechanism currently applies to facilities that produce greenhouse gases equal to or above athreshold of 100 000 tonnes of CO2-e per annum. Reducing this facility threshold to 25 000 tonnes of CO2-e
would capture a greater number of facilities and increase the proportion of emissions covered by thescheme. Under the 100 000 tonne facility thresholds, the SM covered 212 individual facilities that collectively
accounted for about 27% of Australia’s annual greenhouse gas emissions in 2020-21. Including the
grid-connected electricity sector, covered by the SM at a sectoral level, increases this proportion to about
57% of national emissions.
Reducing the facility threshold from 100 000 to 25 000 tonnes of CO2-e would increase the proportion ofnational emissions covered by the SM to about 60%. Arguments against the reduction of thresholds mightnote the diminishing returns to increased coverage as moving to a 25 000 tonne facility threshold while
adding more than 300 additional facilities to the SM would only increase emissions coverage by about
3 percentage points. However, the optimal number of covered facilities is not determined by the ratio ofemissions coverage to facility coverage, but by comparing the marginal social benefit of including more
facilities to the marginal social cost of covering those additional facilities.
Lowering facility thresholds would share Australia’s overall abatement task between a greater number offacilities. It would also place a wider range of facilities on a more level playing field, thereby limiting any
future migration of domestic production towards smaller, less efficient facilities, as carbon constraints
become increasingly binding. It would also reduce the extent to which decarbonising facilities ‘drop out’ ofSafeguard Mechanism emissions controls once their emissions fall below 100 000 tonnes of CO2-e. The
additional compliance burden of moving to a 25 000 tonne facility threshold would be limited, given that thatthese facilities are already required to report their emissions through the National Greenhouse and Energy
Reporting Scheme (NGERS).

Carbon leakage and emissions-intensive trade-exposed industries
Concerns about ‘carbon leakage’ are commonly raised in response to domestic climate policy proposals.
The threat of carbon leakage is said to emerge when domestic climate policy places domestic producers at acompetitive disadvantage to foreign producers that do not face comparable carbon constraints in their homecountries. In this situation, the imposition of domestic carbon constraints could lead to domestic producers
losing market share to foreign producers that do not face carbon constraints, with associated emissions
simply being transferred to (or ‘leaking’ into) those countries — all to no benefit to global emissions. Carbon
leakage concerns are most pronounced for emissions intensive businesses that face international
competition, so called Emissions-Intensive Trade-Exposed Industries (EITEIs).
Common responses to carbon leakage concerns have been to make EITEIs at least partly exempt fromdomestic climate policy. In countries with emissions trading schemes, this commonly takes the form ofproviding a percentage of emissions permits required by EITEIs for free. Carbon Border Tariffs (CBTs) arean alternative approach to addressing carbon leakage concerns, not by protecting domestic producers fromdomestic climate policy, but by making foreign producers also subject to domestic climate policy, through thelevying of import tariffs that are broadly equivalent to the carbon costs faced by domestic producers. While arange of countries have expressed some degree of openness to the CBTs, the most advanced proposal is
the European Union’s Carbon Border Adjustment Mechanism (CBAM), which is planned to be progressively
implemented between 2023 and 2026.
24

Productivity-enabling emissions reductions

However, there are questions about the extent to which carbon leakage will occur in response to domestic
climate policy, given that production location decisions are based on a range of factors, and that many
countries have adopted carbon constraints. Moreover, as the world’s major economies pursue emissions
reduction goals it is plausible that products produced under carbon constraints will come to enjoy acompetitive advantage over those that are not. In addition, if major economies are to meet their net zero
emissions targets, EITEIs will need to collectively contribute to emissions abatement. Failing to impose
carbon constraints on EITEIs will simply transfer the cost of emissions abatement to other sections of theeconomy, or to taxpayers if government is left to purchase a greater number of offsets to achieve national
net zero targets. Any special treatment of EITEIs under the Safeguard Mechanism should weigh the risks ofcarbon leakage against the costs of transferring additional abatement burdens to non-EITEI producers.
Moreover, it should be noted that Australia’s Safeguard Mechanism is effectively a 100% free emissions permit
allocation system for sub-baseline emissions. The Safeguard Mechanism caps facility emissions and requires
those facilities to either pursue internal abatement options or purchase ACCU offsets to bring emissions down totheir relevant baseline. Facilities do not need to pay for any emissions below this baseline. In this way, theSafeguard Mechanism is effectively a 100% free permit system for all sub-baseline emissions. This treatment isprovided to all captured facilities regardless of whether they are considered EITEIs or not.
Over time, Australian EITEIs will need to pay for a growing proportion of their carbon emissions as baselines
are progressively reduced in line with Australia’s nation-wide emissions reduction goals. However, this isbroadly the same treatment as is commonly applied to EITEIs captured by emissions trading schemes, withthe percentage of free permits allocated under emissions trading schemes progressively falling over time.
For example, under Australia’s Carbon Pricing Mechanism (CPM), which operated between 1 July 2012 and30 June 2014, EITEIs were divided into two categories, highly emissions intensive trade exposed (‘high
EITEIs’) and moderately emissions intensive trade exposed (‘moderate EITEIs’). When the CPM first began
operation on 1 July 2012, high EITEIs received 94.5% of average sectoral emissions for free, and moderate
EITEIs received 66% of average sectoral emissions for free. Both rates of free permit allocation werescheduled to fall by 1.3% per annum (Talberg and Swoboda 2013; Talberg, 2013). At that rate, high EITEIs
would have received 81.5% of average emission for free by 2022-23, and moderate EITEIs would havereceived 53% of average sectoral emission for free in the same year.
Similarly, the EU emissions trading scheme (EU ETS) distinguishes between ‘highly exposed’ EITEIs and‘less exposed’ EITEIs (European Commission nd). The former currently receive 100% of permits up to theirrelevant benchmark for free, and the latter receive 30% of permits up to their relevant benchmark for free.
However, the ‘relevant benchmark’ under the EU ETS is the average emissions intensity of the sectors best
performing 10% (least emissions intensive) facilities (IEA 2020b). Similar to the CPM, this approach helps
ensure that those facilities that have previously invested in emissions abatement technologies andprocesses are not placed at a competitive disadvantage for having done so, while also ensuring that someabatement incentives are placed on the less efficient facilities in the sector. However, by choosing the
average emissions of the best performing 10% of the sector, these effects were greater than that elicited by
the CPM’s average sectoral emissions intensity benchmark.
It follows that the SM’s current system of providing 100% free emissions up to facility baselines is moregenerous than the EITEIs provisions of both the EU emissions trading scheme and Australia’s former
Carbon Pricing Mechanism, casting doubt on the need for further EITEIs assistance under the SM.
Finally, providing special treatment to EITEIs is unlikely to protect Australian EITEIs from carbon prices inmarkets that impose carbon border tariffs. For example, the EU’s planned CBAM appears set to only
recognise explicit carbon prices borne by foreign producers in their home market. To the extent that some ofAustralia’s carbon-intensive exports to the EU are captured by the CBAM, the Australian Government should25

5-year Productivity Inquiry: Managing the climate transition Inquiry reportconsider measures that ensure this revenue is collected by the Australian government, not the EU.
Provisions that further lower the effective carbon price imposed by the SM on Australian exporters to the EU,
may be simply offset by higher border adjustments under the CBAM. If a carbon price will be imposed on
Australian exports to the EU in any case, the welfare of the Australian community will be best served by theAustralian Government being the one to collect the associated revenue.
Given these features, the policy case for additional EITEI protections under the Safeguard Mechanism is unclear.
Notable levels of public investment in abatement technologies that may prove crucial for abatement by Australian
EITEIs (section 4.7) further diminishes the case. To the extent that decisions are made to provide further support
to EITEIs, providing this assistance outside of the SM through budget appropriations, rather than through lessstringent SM baselines, would increase the public transparency of this support, while retaining the abatement
incentives generated by the SM. It might also offer greater flexibility for policy makers, with budget appropriations
being potentially less enduring than the longer lasting effects of less stringent SM baselines.
Similarly, calls for Australia to implement its own CBAM should be resisted, recognising that the SM’s systemof free sub-baseline emissions allocations already provides protection against carbon leakage for SM
facilities. Given this context, an Australian CBAM would risk simply acting as a form of trade protectionismthat would ultimately result in higher input prices for Australian businesses, and higher goods and services
prices for Australian households.

Recommendation 6.5
Make the Safeguard Mechanism Australia’s primary emissions abatement mechanism
To increase certainty, reduce investment risk, and promote least-cost abatement, the AustralianGovernment should progressively make the Safeguard Mechanism (SM) Australia’s primaryeconomy-wide abatement mechanism. To this end, the Government should collectively implement thefollowing changes to the SM over time:• define SM baselines, the total amount of annual net emissions that captured facilities are allowed to
produce, in absolute emissions terms, not emissions intensity terms• expand SM coverage by reducing SM facility thresholds, the total amount of annual emissions that afacility can produce before becoming subject to the SM, from 100 000 to 25 000 tonnes of CO2-e• impose SM baselines on individual electricity generators, not at the sectoral level. Failing that, thesectoral baseline for the grid connected electricity sector should be reduced, removing the bulk of theheadroom between current emissions and the sectoral baseline, though this would not have the same
efficiency benefits as directly including individual electricity generators in the SM• expand transport sector coverage: once electricity generators are covered at facility level, the SMshould be extended to liquid fuel wholesalers, with downstream vehicle emissions imputed to them
• allow generation of sub-baseline abatement credits. If SM baselines are expressed in absoluteemissions terms, SM facilities should be allowed to generate emissions credits for emissions abatement
below their SM baseline• no additional Emissions Intensive Trade Exposed Industries (EITEIs) protections should be provided
through the SM. The SM already provides the majority of emissions rights for free, and will continue todo so for the foreseeable future.

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Productivity-enabling emissions reductions

4.4

Promoting the integrity of Australia’s offsets
arrangements

As noted above, projects that generate abatement in accordance with methodologies recognised byAustralia’s Clean Energy Regulator (CER) can earn Australian Carbon Credit Units (ACCUs).
While the biggest buyer of ACCUs is currently the Australian Government, through the ERF, a growing
source of demand is from industrial facilities that are captured by the Safeguard Mechanism.
The Clean Energy Regulator currently allows 37 abatement activities to generate ACCUs. However, about
75% of ACCUs generated under the program have been generated through three methodologies — avoided
deforestation, human-induced regeneration of native forests and landfill gas capture.
Given the ability of Safeguard Mechanism facilities to meet their baselines by using ACCUs, the degree towhich the Safeguard Mechanism credibly contributes to Australia’s emissions reduction goals will depend, atleast partly, on the integrity of ACCUs. Generally speaking, the integrity of an offset project increases withthe extent to which it satisfies three factors — additionality, measurability and permanence.
• Additionality — an offset project is not additional if the project would have gone ahead without the ACCU
revenue, either because it was a commercially viable project in the absence of ACCU revenue, or
because it was required by existing laws and regulations.
• Measurability — an offset project is measurable if its associated abatement can be reliably measured. If
the offset project generates a wide range of potential abatement outcomes, then its value cannot be
reliably measured, and the risk of over-crediting will emerge.
• Permanence — an offset project is permanent if its emissions abatement cannot be reversed at a future
point in time. Permanence concerns are particularly relevant for carbon sequestration projects in forests,
vegetation and soil. Carbon stored in forests, vegetation and soils can be released in the case of fire,disease and changes in rainfall patterns. If the carbon sequestered in trees, vegetation and soil aresubsequently released at some point in the future then the project has not offset emissions, it has simply
delayed the release of those emissions. Make-good provisions, requiring that any release of sequesteredemissions is subsequently re-sequestered, help to reduce permanence concerns with such projects.
The degree to which ACCUs methodologies deliver actual emissions abatement has faced some scrutiny,
with some observers detailing what they regard as systemic flaws in the ACCU generation process(Macintosh 2022; Macintosh et al. 2022b, 2022a; Macintosh, Butler and Ansell 2022), and concluding thatmuch of the abatement claimed under the three most common ACCU methodologies does ‘not represent
real and additional abatement’ (Fearon 2022).
The Independent Review of Australian Carbon Credit Units (The ‘Chubb Review’) released by Government
in January 2023, made a series of recommendations aimed at improving the integrity of ACCUs, including
the discontinuation of the current avoided deforestation method for generating ACCUs (recommendation 9),
an opt-in approach to strengthening additionality baselines for ACCU generating landfill gas project methods(recommendation 10), considering the merits of implementing a scheme-wide ACCU buffer to reduce thechance of system wide over-crediting due to mismeasured or non-additional offset projects(recommendation 7), emphasising the need for human-induced regeneration ACCU projects to beadministered in a way that provides for permanent storage of sequestered emissions (recommendation 8),
greater project level data availability and transparency (recommendation 4) and reforms to the institutionalarrangements governing the scheme (recommendations 1, 2, and 3) (Chubb et al. 2022). The AustralianGovernment has declared in-principle support for all recommendations of the Chubb Review (Bowen 2023).

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5-year Productivity Inquiry: Managing the climate transition Inquiry report

A number of measures stand to assist with the implementation of these reforms. The recommended opt-in tostronger additionality thresholds for ACCU-generating landfill gas capture projects could be assisted by Stateand Territory regulators stipulating the volume or proportion of biogas that needs to be captured by existing
landfill gas capture facilities under existing regulations. Doing so would protect against the possibility thatsome landfill gas capture project operators will opt-in to the higher baselines while others will not, andthereby place project operators within the sector on a more level playing field.
Ensuring that sequestration-related ACCU projects operate in a way that is consistent with expectations thatthe project area will permanently store carbon would be assisted by the alignment of ACCU scheme‘permanence’ provisions with the more enduring permanence provisions of the biodiversity market. Under
the schemes current permanence provisions, sequestration-related project proponents can opt-in to either a25-year or 100-year ‘permanence period’, with make-good requirements only placed on emissions reversals
during the chosen permanence period. For example, if a project proponent opted-in to a 25-yearpermanence period, and bushfire or insufficient rainfall led to the release of emissions previously
sequestered by the project in year 24 of the project, the project proponent would have to undertake
measures to re-sequester those released emissions. If the emissions reversal occurred in year 26, theywould not. Similarly, if the project proponent opted-in to the 100-year permanence period and an emissions
reversal event occurred in any year within that 100-year period, they would have to re-sequester thosereleased emissions. If the reversal occurred outside of the 100-year period, they would not.
Currently, 55% of vegetation-related ACCUs, and 98% of soil-carbon related ACCUs, have opted in to the 25-yearpermanence period. The remainder have opted in to the 100-year permanence period (DCCEEW, pers. comm.,
6 December 2022). Given that Australia has 27 years to achieve its 2050 net zero target, sequestration-related
projects that have opted in to a 25-year permanence period present a potential contingent liability for theAustralian government, were shifting rainfall patterns, rising temperatures and increased bushfire frequency tolead to emissions reversals from sequestration-related projects in the years between the end of the 25-yearpermanence period and 2050. Were emissions reversals to occur within this period, it would potentially fall to theAustralian Government to make up for these emissions reversals through the purchase of a proportionate volumeof ACCUs, thereby placing a contingent liability on the Commonwealth budget.
Aligning the permanence provisions of the ACCU market with the more enduring permanence requirementsof the biodiversity market would help to increase community confidence in sequestration-related ACCU
projects. They would also help to manage the extent to which they inadvertently place contingent liabilities
on the Commonwealth budget. While permanence requirements can vary, it is relatively common forbiodiversity projects to have perpetuity-based permanence requirements placed on them, often implemented
through biodiversity covenants on the land hosting the biodiversity project (Hardy et al. 2017). Alternative
principles include requiring the biodiversity offset project to last for at least as long as the biodiversity impact
being offset. For example, if a proposed development imposed a biodiversity impact that was estimated tolast for 75 years, the offset project should last for at least 75 years. If the biodiversity impact was estimatedto last for 125 years, the offset project should operate for at least 125 years (OECD 2016).
Given that CO2 emissions can last for between 300 and 100 years in the atmosphere (Buis 2019) the current
25- and 100-year permanence periods of sequestration-based ACCUs appear to arbitrarily fall short ofreasonable permanence expectations, and of the standard asked of biodiversity offsets.
Finally, delivery on the Chubb Review’s call for greater project-level transparency and data sharing could begiven effect to by requiring the publication of project-level offset reports submitted to the Clean Energy
Regulator for the purpose of claiming ACCUs, and periodic audits that ACCU projects are subject to.

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Productivity-enabling emissions reductions

Recommendation 6.6
Increase the integrity of carbon offsets recognised by the Safeguard Mechanism
To make emissions reductions credible, the Australian Government should discontinue the 25-yearpermanence period for sequestration-related ACCU projects, introduce an additional class ofsequestration-based ACCUs that align with the more enduring permanence provisions of the biodiversity
market, and publish offset reports and project audit reports required by the Clean Energy Regulator. Stateand Territory Governments should stipulate the proportion of biogas that needs to be captured by existing
ACCU-generating landfill gas capture projects under existing regulations.

4.5

Distributional considerations

The absence of economy-wide abatement policies places pressure on policy makers to implement sectoraland sub-sectoral policies such as subsidies for home solar panel installation, subsidies for low emissions
technology deployment by industry and tax concessions for electric vehicles. These measures are not only
more costly than economy-wide alternatives, but they can also raise several distributional concerns. First by
imposing higher overall abatement costs on Australia that fall disproportionately on different sections of thecommunity; and second, by selectively benefiting some sections of the community more than others. For
example, electric vehicle subsidies channelled through salary sacrifice and fringe benefits tax arrangements
might be expected to principally benefit higher income individuals who tend to have the greatest interest insalary sacrifice and fringe benefits arrangements.
By contrast, distributional impacts of economy-wide carbon pricing measures will mainly reflect impacts on
prices of goods and services. As lower income households spend a higher proportion of their incomes they
may bear a disproportionate burden, but regressivity may be moderated by the higher emissions intensity ofhigh income household consumption patterns and once impacts over the lifecycle are accounted for.3
Moreover, the fact that the Safeguard Mechanism does not price sub-baseline emissions allowances should
help to mitigate such concerns. While falling baselines will progressively impose greater abatement goals on
captured facilities, all sub-baseline emissions will continue to be unpriced. Moreover, the key household
assistance measure implemented following the introduction of the Carbon Pricing Mechanism on 1 July 2012
— the tripling of the tax-free threshold from $6000 to $18 200 — remains in place today, despite the Carbon
Pricing Mechanism ceasing operation on 1 July 2014.

4.6

The role of other measures

With a national emissions reduction target in place, and a broad-based emissions abatement mechanism
implemented to achieve it, the public policy case for additional sectoral interventions would rely on thoseadditional interventions being genuinely ‘complementary measures’: that is, measures that either efficiently
address non-price barriers to abatement, or that deliver broader non-carbon abatement social benefits. For
example, were the Safeguard Mechanism to be made more binding on the electricity generators, the ongoing

3 Given that incomes tend to rise and fall over the course of an individual's life, assessing the regressivity of a particularpolicy change at a given point in time can generate a higher regressivity estimate than when total lifetime income andtotal lifetime income are taken into consideration.

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5-year Productivity Inquiry: Managing the climate transition Inquiry reportneed for additional policy support for renewable energy would be brought into question, unless it could be shownthat it efficiently remedied non-price barriers to renewable energy uptake or drove non-carbon social benefits.
Similarly, were an amended Safeguard Mechanism to be extended to the transport sector, or covered by abroadly comparable mechanism, the policy case for Commonwealth tax concessions for electric vehicles(which, given their high cost per tonne of abatement, is weak even without a broad-based abatement
mechanism) would be further diminished.
This would also be true for the range of state and territory measures that are currently in place, including
jurisdictional emissions targets. Once a national emissions abatement target is established, and an
economy-wide abatement policy is implemented to achieve it, these measures would impose a range ofcosts on the Australian economy, for little or no benefit to the national emissions abatement task. While suchstate measures may be publicly justified on the grounds that they would allow states to capture a desired
share of the new industries and the ‘green jobs’ associated with them, such motivations are likely to rendersuch measures a form of industry assistance that would likely add to Australian abatement costs for little
actual gain to nationwide emissions reduction efforts (box 4.5).
Given the potential for such policy interactions, it will be important that Australian governments(Commonwealth, State, and local) take a coordinated and disciplined approach to policy development.
Sound policy development would include demonstrating how new and existing policies complement the SM
central mechanism or target additional emissions abatement measures in sectors not covered by the
Safeguard Mechanism. Policies that are found not to be complementary to the SM should be phased out,
and all remaining policies should have their expected implicit carbon price independently estimated andindependent and made public.

Box 4.5 – ‘Green jobs’ and industry policy under an emissions cap
Once national emissions reduction targets are in place, economy-wide policy settings to achieve thosegoals are implemented, and the credibility of any associated offset regime is ensured, the value ofadditional state-based measures will depend on the extent to which they are complementary measures —either efficiently addressing non-price barriers to abatement or delivering non-carbon abatement benefits.
States and territories pursuing individual abatement policies that do not satisfy these conditions would
not make additional contributions to national decarbonisation but would simply alter the distribution ofthat national abatement between the states and territories — driving increased abatement in their own
states while simultaneously freeing up emissions space for other states and territories to use – likely at
greater overall cost. Doing so would constitute a form of state-based industry policy, directing resources
to abatement industries in that state or territory, for no benefit to the overall emissions abatement task.
Such industry policy might be communicated as supporting ‘green jobs’ or ‘clean energy jobs’ in thatstate or territory but the value of doing so would be of questionable value for several reasons. First,
pursuing sectoral jobs targets typically does not lead to additional overall employment, it simply
reallocates workers from one industry to another, likely at the expense of the comparative advantage of
those workers, weighing on productivity in the process. This reallocation effect is starker in a near full
employment economy.
More generally, once an economy is pursuing a national emissions reduction target the notion of ‘green
jobs’ begins to lose meaning. First, because lower emissions intensity jobs in one jurisdiction simply

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Productivity-enabling emissions reductions

Box 4.5 – ‘Green jobs’ and industry policy under an emissions cap
allow others to engage in higher emissions intensive activity, and second because some emissions
intensive activities will be required to pursue longer-run emissions reductions e.g. coking coal, iron ore,bauxite and rare earths extraction and processing are all currently required for the deployment of
renewable energy and battery technology.
Whether a country should be regarded as a ‘green’ economy or a ‘clean energy’ economy is moremeaningfully judged by the overall emissions intensity of the economy, not the emissions intensity of theindividual jobs and industries that comprise it.

Recommendation 6.7
Phase out policy measures not complementary to the Safeguard Mechanism
Policy measures that are not complementary to the Safeguard Mechanism (SM) should be phased out to lower
the overall cost of abatement. A review of existing measures should be undertaken to assess theircomplementarity to a reformed SM and recommend a timetable for the removal of non-complementarymeasures identified by the review. A ‘complementary measure’ would be one that drives emissions abatementfrom emissions sources not covered by the SM, addresses market failures that constrain the pursuit ofabatement from emissions sources covered by the SM, or that delivers broader non-carbon abatement related
benefits. Remaining non-Safeguard Mechanism policies should (1) stipulate how they are complementary to
the SM, and (2) have their estimated abatement costs independently estimated and made public.

Least-cost electricity grid stability
Growing renewable energy uptake has raised questions about the future reliability of the electricity grid,
given the intermittence features of individual wind and solar panel installations. This has led some toemphasise the importance of introducing stabilising technologies to the electricity grid as it becomesincreasingly renewable. To this end, on 8 December 2022, Commonwealth and State Governments
announced their intention to introduce a Capacity Investment Scheme (CIS), by the second half of 2023. The
final design of the CIS is yet to be made public, but the plan appears to be to pay suppliers of dispatchable
renewable electricity (renewable electricity that can be made available at short notice), to pre-commit to
making that electricity available as needed. It appears that non-renewable sources of electricity, like coal andgas fired power stations, will be excluded from the scheme.
Capacity mechanisms generally make capacity payments in advance of that capacity being required. In thisway it can be considered a kind of retainer system, paying dispatchable electricity providers to commit toprovide capacity during periods in which the demand for electricity exceeds supply. By contrast, statements
to date suggest that the CIS will principally operate through a revenue underwriting mechanism, the value of
which will be determined through periodic auctions, and which will be subject to both a price floor and ceiling.
A mechanism might be designed to pass on the cost of these capacity/underwriting payments to network
providers or retailers, and ultimately to household and business end users. Equally, these costs may simply
be funded through taxation revenue.
It is not yet clear whether the announced CIS will be open to distributed household and business battery
installations, aggregated and coordinated through ‘virtual power plant’ (VPP) platforms. Nor is it clear31

5-year Productivity Inquiry: Managing the climate transition Inquiry report

whether demand side participation, either by large electricity users, or by large numbers of small users
aggregated through VPP platforms, will be allowed. Demand side participation could stabilise the electricity
grid not by bringing supply into greater alignment with demand at each point in time, but by bringing demand
into greater alignment with supply. For example, a VPP operator could fund the installation of technology
required to simultaneously reduce non-essential sources of electricity demandthroughout hundreds of homes
and businesses and provide readily reducible demand, the demand side equivalent of dispatchable electricity
supply, during periods of grid instability. Maximising the number of technologies and approaches that areallowed to bid into the mechanism would be consistent with a least-cost approach to managing intermittencechallenges in the electricity sector.
The CIS would mark a move away from Australia’s current system of principally relying on variable wholesale
prices to balance supply and demand in Australia’s electricity markets. While wholesale electricity prices arecapped in the National Electricity Market (NEM), that cap is relatively high by international standards (ESB 2022,
p. 11). The higher that prices are allowed to rise in the wholesale market, the greater the commercial feasibility of
dispatchable electricity suppliers being purpose built to only generate electricity during unusually high priceperiods, either due to unusually high levels of electricity demand, or due to unexpected disruptions to electricity
supply. Similarly, the higher that prices are allowed to rise, the greater the likelihood that energy users would
make the investments required to notably reduce electricity demand during high price periods.
One of the advantages of relying on price signals to coordinate the matching of electricity supply anddemand is that higher prices only need to be paid during those times when demand is greater than supply(see box 4.6 for discussion of the value of variable prices). By contrast, capacity payments to dispatchable
electricity providers are to retain that potential capacity 24 hours a day, 7 days a week, and 365 days a year.

Box 4.6 – The benefits of price variability for grid stability, and broader policy goals
Prices act as a coordinating mechanism, helping to align the supply of a good or service in an economy
with the demand for that good or service. An increase in prices for a particular good or service signalsthat demand is greater than supply, encouraging additional supply from producers, and reducing demand
from users that no longer value the good or service at the higher price. Similarly, price falls signal that
supply is greater than demand, encouraging increased demand from users looking to take advantage oflower prices, and reduced supply from producers that require higher prices to remain viable. Thesedemand and supply side responses combine to align supply and demand over time.
The coordination benefits of variable prices are just as applicable to the electricity sector, which can bebroadly broken down into three separate markets — the market for generation fuels, the wholesalemarket for electricity and the retail market for electricity. However, a range of price caps currently operate
in all three markets in Australia, which run the risk of detracting from system reliability in somecircumstances. These risks should be weighed against the perceived benefits of price caps when
deciding whether to maintain existing price caps or proceed with the application of new price caps.
Generation fuel market — Price variability in the generation fuel market, largely coal and gas inAustralia, allows the market share of competing generation types to vary so as to minimise the average
cost of electricity produced by the wholesale market. For example, all else equal, as the price of coal andgas increases, the proportion of electricity supply delivered by coal and gas fired generators can be
expected to fall, and the proportion delivered by renewable energy to rise. Similarly, as the price of coal32

Productivity-enabling emissions reductions

Box 4.6 – The benefits of price variability for grid stability, and broader policy goals
and gas falls, the share of electricity produced by coal and gas fired generators can be expected to rise,
and that from renewables to fall.
Restrictions on this mechanism, like the December 2022 imposition of price caps on coal and gas sold tocoal and gas fired generators, risks impeding this mechanism. While designed to be only a short-term
measure to deal with energy market disruptions, interventions designed as short-term measuresfrequently become long-run policy settings. All else equal, depending on supply responses as discussed
below, the longer that such price caps remain in place the greater the likelihood that they will artificiallyconstrain the ability of renewable electricity producers to compete with subsidised coal and gas fired
generators, potentially constraining the uptake of renewable energy to some degree.
The amount of coal and gas supplied to electricity generators at the capped price could also decline were
supply diverted to export markets where higher, uncapped, prices are on offer. While some coal mines
are not in a position to do so, if those coal mines that are positioned to divert supply to the uncapped
export market were to do so, it may cause output disruptions for generators that are unable to secure thefuels that they require. Were that to occur, price caps aimed at placing downward pressure on wholesale
electricity prices could have the unintended consequence of reducing grid reliability, thereby placing
upward pressure on wholesale electricity prices.
Wholesale electricity market — The value of variable prices for grid reliability is also apparent in thewholesale market, by helping to bring supply and demand into alignment over the course of the day. In
the extreme, the ability and probability of wholesale prices rising to very high levels might be sufficient tojustify investment in dispatchable capacity just for periods of elevated market stress, even if only
occurring several times per year. While wholesale prices are capped in the National Electricity Market,
they are relatively high by international standards (ESB 2022).
The Capacity Investment Scheme announced by Commonwealth and Energy Ministers in December
2022 appears set to operate alongside existing wholesale price caps. If the scheme operates as
intended, the range of prices experienced in the wholesale market should moderate, albeit with much of
the associated decrease in average prices offset by capacity payments. It follows that were the scheme
to be phased out at a future date, perhaps once the generation fleet had completed the transition fromcoal fired power stations to renewables and storage technology, the range of prices observed in thewholesale market would widen, all else equal, taking on much of the coordination required for gridstabilisation previously provided by the scheme.
Retail electricity market — Price variability in the wholesale market can create challenges for electricity
retailers when they interact with harder price caps in the retail markets, imposed through annual Default
Market Offer (DMO) regulatory determination processes, which caps the price of electricity for households
and businesses that opt-in to standard contracts. While only about 10% of households and about 18% ofbusinesses were on standard contracts in 2022 (AER 2022), they can constrain prices for non-standard
electricity contracts by acting as a point of reference, and by acting as a substitute product.
The combination of variable wholesale prices and constrained retail prices presents a financial risk thatretailers generally use derivatives to hedge away, though this can prove challenging during extended
periods of pronounced market stress. DMO-related constraints on retailer prices are designed to protect
consumers from being overcharged by electricity retailers. However, they also constrain the degree of pricevariability that could encourage a greater proportion of households and businesses from contributing to grid33

5-year Productivity Inquiry: Managing the climate transition Inquiry reportBox 4.6 – The benefits of price variability for grid stability, and broader policy goals
stability, by reducing electricity usage during those times in the night when prices are high, and increasing
use while prices are low. Under standard contracts, price variability is limited to off-peak, shoulder and peakpricing over the course of the day.
Constraints on retail price variability may become an increasingly important consideration as Australia’s
transport fleet progressively moves to electric vehicles (EVs), which could either contribute positively or
negatively to grid stability. EVs could contribute to grid stability if they were charged at those times of the
day when electricity demand is low and supply is high, and partly discharged during peak periods when
demand on the electricity grid is high. If the reverse charging pattern emerges, charging EVs during peak
periods, then the rise of EVs may compound pressures on the electricity grid. Price variability in the retailelectricity market may prove the most effective means of encouraging EV charging patterns that
contribute to grid stability. This may be sufficiently encouraged by peak, shoulder and off-peak pricedifferentials over the course of the day but will warrant monitoring as the transport fleet electrifies.

A well-functioning CIS would reduce the range within which wholesale electricity prices would move, with
CIS-underwritten capacity being called to market as wholesale prices start to rise, which could notionallyleave average electricity prices unchanged relative to what would otherwise be the case. However, relianceon a high-profile CIS for electricity grid resilience may lead to ‘over-insurance’, supporting more investment in
dispatchable capacity than is necessary to provide grid stability, and thereby delivering electricity system
resilience at a higher average cost than might have been delivered by variable prices alone.
It is also unclear to what extent the CIS will be required to drive investment in storage capacity, given
previous Commonwealth and State government commitments to invest in storage capacity, and the likely
uptake of battery technology by households and businesses over coming years. For example, the NSW
Government Renewable Energy Zones program includes support for large chemical battery storage facilities
such as the 700 MW Waratah Super Battery, Victoria has committed $119 million to the delivery of a 2.6 GW
battery storage target by 2030 and 6.3 GW by 2035, and the Australian Renewable Energy Agency (ARENA)
has set aside $176 million for its Large Scale Battery Storage investment stream, through which it has either
provided or pledged financial support for the installation of a fleet of large scale batteries throughout
Australia. In addition, according to the Australian Energy Market Operator (AEMO) Integrated System Plan,
more than two thirds of grid stabilising capacity required by 2050 could plausibly come from small scale
distributed sources such as home battery installations, a rapidly growing fleet of electric vehicle batteries
which could contribute to grid stability by recharging during the middle of the day when solar power output isrelatively high and running a proportion of the battery down at night when electricity demand is relatively
high, and smart-meter supported demand side responses by households and businesses, reducing theamount of power they use when electricity demand is high and relaxing these constraints as electricity
supply increases. It remains to be seen how well these sources of grid stability will be directly accessed by
the CIS, or how efficiently they will indirectly reduce stabilisation demand through the CIS.
Finally, when considering the grid stability challenge ahead, it is worth distinguishing between two distinct
sources of potential grid instability. The first phase is transitional, relating to uncertainty around the sequencein which existing coal-fired power stations shut down and exit from the grid, potentially before an offsetting
quantity of renewable generation capacity becomes operational. The second is more structural and relates
more strictly to the intermittence features of individual photovoltaic and wind installations. The design of the
CIS might differ on the basis of which of these sources is of greatest concern. If the transitional grid stability
challenge is the dominant concern, a least-cost capacity mechanism might be more short-lived in nature and34

Productivity-enabling emissions reductions

be open to participation by existing coal and gas fired power stations. If the latter is the greatest concern,then there might be calls for the CIS to be more enduring.Given that these questions will only be resolved
with time, there might be value in placing a five-year sunset clause on the proposed CIS and committing toan independent public review of the effectiveness of the CIS before deciding to extend it. That review could
weigh the magnitude of ongoing costs of the CIS against the costs of potential grid disruption events in the
future, and the extent to which the CIS has delivered greater grid stability at lower overall cost than pricevariability in wholesale electricity markets.
In the meantime, a least-cost CIS would be technology neutral, allowing both supply and demand side
participation. While inclusion of the coal and gas fired power stations in the CIS appears to have been ruled
out, it is possible that governments will weigh the merits of policy interventions aimed at extending the life ofthese generators. Inclusion of coal and gas fired power stations in the CIS would come with the benefit ofproviding some transparency around the cost of any such interventions. If they are not included,
governments should be transparent about the value of any such support. In addition, when reviewing theeffectiveness of the CIS, the grid stabilising effects of the CIS should be distinguished from the gridstabilising effects of interventions to extend the life of coal and gas fired power stations.

Recommendation 6.8
Pursue a least-cost approach to securing electricity supply
The proposed Capacity Investment Scheme should be implemented with a five-year sunset clause, andindependently reviewed ahead of any decision to extend its life. It should be implemented on a technology
neutral basis, allowing for both supply and demand-side participation by households and businesses.

4.7

Public support for research and development

There is a clear public policy case for government support of climate-change related research anddevelopment, particularly in frontier technologies where market failures are most relevant. As for any R&D
support – whether to businesses, universities and other research bodies — clear criteria and transparent
oversight are important, albeit recognising that failures at this early experimental stage are to be expected.
The case for public support of commercialisation of new technologies is generally weaker because, distinct
from basic research, businesses are usually well placed to assess market risks and to capture the benefits.
But where clear and consistent pricing of greenhouse emissions is absent, commercialisation of new low
emissions technologies is made riskier and some government support may be appropriate. However, suchcontributions bring their own risks. Contributions should be transparent, and subjected to cost benefit
analysis. In particular, it is important that governments have a mechanism to ‘move on’ once it becomes
clear that a particular frontier technology is unlikely to meaningfully reduce long-term abatement costs (atleast on a timeline that is relevant to climate policy) or indeed that the new technology has becomecommercial. Sunk costs should not determine whether funding continues. Mechanisms to prompt a ‘moving
on’ from such technologies include making further funding conditional on the meeting of pre-defined progress
thresholds and introducing formal institutional arrangements, such as sunset clauses, to allow
reconsideration and assessment of the costs and benefits of additional funding.
Such an approach might prove useful for the hydrogen sector, which has received substantial investmentsfrom both Commonwealth and State Governments, and CCS technologies which have received the highest
amount of public support to date (box 4.7). The efficiency of investment into CCS technologies that has

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5-year Productivity Inquiry: Managing the climate transition Inquiry report

already taken place has been questioned by research institutions and public commentators (Browne andSwann 2017; Macdonald-Smith 2022a, 2022b; Turnbull 2017). However, irrespective of whether CCS makes
a meaningful contribution to the pre-2050 abatement task, it may be important for the post-2050 ‘draw-down’of excess atmospheric stocks of greenhouse gases (IEA 2021; IPCC 2022; Macdonald-Smith 2021).
Once a broad-based emissions abatement mechanism is in place, consistent with achieving targets, allprojects utilising low emissions technologies, new or old, have a commercial advantage over emissions
producing ones, thereby reducing the policy case for ongoing government support.

Box 4.7 – Public R&D support for abatement technologies
Government can play an important role in supporting research and development into new technologies
when market failures constrain private activity. This role is strongest in the case of frontier technologies,
where market failures are most pronounced. To date, Commonwealth and State Government investment
has provided support for a range of emissions abatement technologies, including carbon capture andstorage, and more recently, hydrogen.
Australian climate technology support
Level of Government

Technology

Value of assistanceCommonwealthHydrogen fuel$1 billion in direct Australian Government
assistance (excluding CCS).a

Future fuels and vehicles$2.1 billionb

Large-scale energy storage$100 millionc

Ultra low-cost solar

Up to $40 milliond

Carbon capture and storage

Between 2003 and 2017, the Government
committed over $3.5 billion to CCS and over$1.3 billion was distributed.e More recently, theGovernment has invested over $300 million tofund carbon capture, use and storage (CCS)
projects and advance technologies, including
establishing CCUS hubs near industrial areas.a

Soil carbon$1.6 millionf

New South Wales

Hydrogen fuel$70 milliona

Victoria

Hydrogen fuel$10 milliona

Tasmania

Hydrogen fuel$0.2 milliona

Western Australia

Hydrogen fuel$47.5 milliona

a. DISER (2021i, pp. 24, 34, 37, 40, 44). b. DISER (2021f, p. 10). c. ARENA (2022, pp. 3–4). d. ARENA (2022b).
e. Browne and Swann (2017). f. Taylor (2022).

36

Appendix

Appendix37

Indirect carbon price estimation

A. Indirect carbon price estimation

This appendix details the methodology used to estimate the indirect carbon prices reported in volume 6. We
use the term indirect carbon prices to refer to the fiscal cost of the policy per tonne of CO2-e abatement. Ourestimates can be thought of as similar to the implicit abatement subsidies estimated by the Commission
previously (PC 2011). The indirect carbon prices listed in the chapter and detailed here are not meant to be
exhaustive. There are many policies for which an indirect carbon price has not been estimated.

A.1

Fringe Benefits Tax exemption

The indirect carbon price associated with the policy to exempt electric vehicles (EVs) from Fringe Benefits
Tax (FBT) ranges from $987 to $20 084, depending on the assumptions used in the estimation process.
When an employer makes a car available for an employee’s private use they are liable to pay FBT. The
taxable value is equal to the base value of the car, multiplied by the ‘statutory percentage’ (20%). This value
is then grossed-up to reflect the gross salary employees would have to earn at the highest marginal tax rate(including Medicare levy) to pay for the benefits after paying tax (ATO 2019). Fringe benefits are taxed at the
top marginal income tax rate (47%). Alternatively, when an employee acquires the car through asalary-sacrificing arrangement, the taxable value is not grossed-up and FBT is levied at that employee’s
marginal income tax rate (ATO 2021).
The Treasury Laws Amendment (Electric Car Discount) Bill 2022 passed into law in December 2022. It
exempts Battery Electric Vehicles (BEV) and Plug-in Hybrid Electric Vehicles (PHEV) from FBT. To be
eligible for the exemption, the value of the car at the first retail sale must be below the Luxury Car Tax
threshold for fuel efficient cars, which is currently set at $84 916 (Chalmers 2022). The current eligibility of
PHEV’s under the scheme will sunset from 1 April 2025. The policy reduces the annual cost of leasing an EV
for employees that choose to do so through a salary sacrifice package and for employers that choose toprovide an EV for the private use of an employee. Though these savings are ultimately financed by theAustralian community through foregone tax revenue collections.

Fiscal cost
The fiscal cost of the FBT exemption is based on Government estimates that a $50 000 EV leased via asalary sacrifice arrangement would save employees $4700 per annum (Chalmers 2022). This figure wasthen multiplied by 4 years, aligning with the assumed lease life used in the Parliamentary Budget Office(PBO) costing of the policy (PBO 2022), to arrive at an overall fiscal cost of $18 800 per EV. This estimate is
likely conservative, given that it assumed a $50 000 electric vehicle and that the FBT exemption is available
for EVs priced up to the LCT threshold for fuel efficient vehicles, currently set at $84 916.

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5-year Productivity Inquiry: Managing the climate transition Inquiry report

Emissions abatement
The emissions abatement resulting from this policy can be measured as the difference between emissions
produced by the extra EVs that are purchased because of this policy and the average emissions of the vehicles
that they replace. EV emissions are those emissions associated with the grid electricity required to charge the EV,
factoring in the projected decarbonisation over the electricity grid over the period out to 2050 (more below). Whilesome EV recharging stations are powered solely by renewable energy, and some EVs will be charged fromhomes and workplaces with onsite renewable generation capacity, this will not be universally the case. Moreover,in most cases, the use of onsite renewable energy to charge EVs would preclude the export of that renewableenergy to the electricity grid, or lead to increased demand on the grid to source the electricity to provide for
non-EV charging uses, that would have otherwise been supplied by the onsite renewable energy generation.
Nevertheless, to identify the proportion of the indirect carbon price that is attributable to the emissions intensity ofthe electricity grid, we undertake a sensitivity test of our baseline indirect carbon price estimates by assuming thatgrid emissions are zero. These numbers are provided in brackets in table 4.2.
Emissions from internal combustion energy (ICE) powered cars arise come from the burning of liquid fossil
fuels. The parameter values used in our estimate is the average emissions intensity of new passenger
vehicles in 2021 and the average number of kilometres travelled by vehicles each year in 2018, the latest
pre-COVID year for which data is available. The latest pre-COVID year was chosen given that widespread
supply chain disruptions, lockdowns, and border closures likely contributed to the reduction in the average
number of kilometres travelled by passenger vehicles in 2020. Broader lifecycle emissions, those generated
throughout the supply chain in the process of manufacturing vehicles, were not considered.
To estimate the amount of abatement, the following parameters and assumptions were used (table A.1).
Table A.1 – Assumptions underpinning the emissions abatement estimate
Parameter

Description

Assumed value

SourceAverage kilometres driven

12 600 km

ABS 2020

151 Wh/km

EV Database 2022

Emissions per kilometre

146.5 g/km

NTC 2022

𝑬𝑭

Emissions factor

See table A.2

𝑨

Additionalitya

5–75%

𝑩𝑭

Bring-forwardb

3–13 years𝒌𝒎

per year
𝑬𝑽𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚

Electricity consumption perkilometre

𝑰𝑪𝑬𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚

a. Additionality refers to the proportion of abatement — in this case the proportion of EVs — that would not haveoccurred in the absence of the policy. b. Bring-forward refers to the difference between when the car is acquired with thepolicy in place and when it would have been acquired in the absence of the policy.

The equation for calculating the amount of emissions abatement is as follows:
𝐵𝐹

𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐴𝑏𝑎𝑡𝑒𝑚𝑒𝑛𝑡 = ∑(𝐼𝐶𝐸𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 − 𝐸𝑉𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 × 𝐸𝐹𝑡 ) × 𝑘𝑚 × 𝐴
𝑡=1

Underpinning the emissions abatement estimate is an assumption about how the emissions intensity of theelectricity grid evolves over coming years. Our modelling used the development path AEMO viewed as most
likely, Progressive Change least-cost DP with actionable Marinus Link, and staged VNI West and HumeLink(AEMO 2022). This development path is used to calculate the share of electricity generation coming from40

Indirect carbon price estimation

renewable and non-renewable sources. In turn, these shares are used in a simple linear regression toestimate the emissions factor for each year until 2049-50:
̂1 𝑆ℎ𝑎𝑟𝑒𝑁𝑜𝑛𝑅𝑒𝑛𝑒𝑤𝑎𝑏𝑙𝑒𝑠𝑡
̂𝑡 = 𝛽𝐸𝐹
The emissions factor associated with consumption of purchased electricity or loss of electricity from the gridis forecast to fall from 0.73 in 2019-20 to 0.04 in 2049-50 (figure A.1).
Figure A.1 – Forecasted average emission factors for Australian electricity
Kilograms of CO2-e per kilowatt hour
0.80
0.70
0.60
0.50

0.40
0.30
0.20
0.10
0.00
2019

2022

2025

2028

2031

2034

2037

2040

2043

2046

2049

Source: Productivity Commission estimates using DISER (2021b); AEMO (2022).

Each EV taken up under the policy is assumed to last for 15 years. This reflects an assumption that after the
4-year lease term, the EV is sold into the used car market and thereby continues to generate emissions
abatement relative to what would have otherwise been the case.
Assumptions about the degree of additionality and the degree of bring forward of EVs (ultimately) purchased
through the policy are also relevant to the estimated abatement of the policy.
Additionality refers to the proportion of EVs demanded through the policy that would not have otherwise
been demanded. An EV sourced through a salary sacrifice arrangement under the policy would not be
additional if that EV would have otherwise been purchased or leased by that person without the FBT
exemption, or purchased or leased by another individual, household, or business in Australia. If the policy
supported non-additional demand for EVs then the abatement associated with that demand could not be
attributed to the policy. Bring-forward is conditional on additionality and refers to the number of years that anadditional EV leased as a result of the policy would have been brought forward from 2035, from when it isassumed that EVs will dominate the new car market and when an EV would have been sourced in theabsence of the FBT exemption. This degree of bring-forward is relevant to the level of abatement that can be
expected from an EV over its assumed 15-year life, given that the decarbonisation of the electricity grid willbe less progressed the greater the bring-forward, and more progressed the lower the level of bring-forward.
The Commission has not sought to estimate the likely additionality or bring-forward elicited by the FBT
exemption for EVs, but has sought to provide the reader with an indication of the indirect carbon price impacts

41

5-year Productivity Inquiry: Managing the climate transition Inquiry reportof a range of additionality and bring-forward assumptions. The lower bound indirect carbon price estimate
assumed 75% additionality, meaning that 75% EV’s leased under the FBT exemption would not have otherwise
been purchased or leased in the absence of the FBT exemption. The upper bound estimate assumed only 5%
additionality, relevant to a world in which supply side constraints will continue to be the dominant barrier to EV
uptake in Australia (see box 4.4 for discussion). This range is not a forecast per se, but provides the reader witha sense of the indirect carbon price implications of key additionality assumptions. Bring-forward assumptions
range from 13 years (from 2035-36 to 2022-23) to 3 years (from 2035-36 to 2032-33), reflecting an assumed
10-year life for the FBT exemption policy, aligning with the 10-year policy assumption used for policy costing
purposes PBO (2022). While government has not set a time limit for the FBT exemption for battery electricvehicles, the 10-year life assumption is useful for constraining our range of ‘bring-forward’ assumptions. The
lower bound indirect carbon price estimates includes a 3-year bring-forward assumption, while the upper boundincludes a 13-year bring-forward assumption.
Finally, these estimates relate to Battery Electric Vehicles (BEV) only. Given that Plug-in Electric Vehicles(PHEVs) will be eligible for FBT exemption until 1 April 2025, and that they will continue to generate
emissions while running off the ICE-based component of their engine, the 100% BEV assumption further
acts to render these estimates conservative.

Bringing fiscal cost and emissions abatement together
The indirect carbon price associated with the policy was estimated on a per-unit basis and calculated
according to the following formula:
𝐼𝑚𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑎𝑟𝑏𝑜𝑛 𝑃𝑟𝑖𝑐𝑒 =𝑇𝑎𝑥 𝐹𝑜𝑟𝑒𝑔𝑜𝑛𝑒
𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐴𝑏𝑎𝑡𝑒𝑑

Our lower bound estimate of the indirect carbon price is $987 per tonne of CO2-e and the upper boundestimate is $20 084 per tonne of CO2-e.

Implications of assumptions about parameters
Conducting sensitivity analysis by adjusting the parameters helps illustrate which parameters most effect theestimated indirect carbon price. Some are far more important than others. Table A.2 shows the change in theindirect carbon price that occurs if each parameter is decreased by 10%. The baseline from which theseeffects are measured is the lower bound estimate, that is, additionality is assumed to be 75% andbring-forward is assumed to be 3 years.

What if grid emissions were zero?
Though our model allows for an increasing share of renewables in electricity generation over time, it assumes thatthe emissions intensity of non-renewable generation remains constant. This assumption is likely to bias upwards
our estimate of the carbon price because gas, which is less emissions intensive than coal, is likely to make up alarger share of non-renewable generation in the future (AEMO 2022). The bias is likely to be small. Even if we
assumed that emissions associated with electricity generation were zero — or equivalently, that all EVs arecharged using renewable energy sources — which provides an absolute and unrealistic lower bound, theestimated indirect carbon price only falls by 8.3% in the case of the FBT exemption. If the emissions factor
associated with consumption of purchased electricity or loss of electricity from the grid is 10% lower than forecast
each year, the indirect carbon price would be 3.3% lower (table A.2).

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Indirect carbon price estimation

Table A.2 – Effects of decreasing parameters by 10%

Parameter

Effect of a 10% decrease on the

Effect of a 10% decrease on theestimated indirect carbon priceestimated indirect carbon price

(%)

($/t)

Description

𝑽𝒂𝒍𝒖𝒆

Value of the EV-10.00-99

𝑳𝒆𝒂𝒔𝒆

Average lease period-10.00-99

𝒌𝒎

Average kilometres

11.11

110

-3.30

-36

15.50

153

driven per year
𝑬𝑽𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 Electricity consumption
per kilometre
𝑰𝑪𝑬𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 Emissions per kilometre
𝑬𝑭

Emissions factor

-3.30

-36

𝑨

Additionality

7.48

74

𝑩𝑭

Bring forward

-4.66

50

What if the average lease length was not four years?
The estimation approach implicitly assumes an average lease length of four years. There is no change to theannual amount of fringe benefits tax payable for each of the first four years of a lease. Hence, reducing the
average lease length by one year causes the estimate of the indirect carbon price to fall by 25%. In the fifth
year of a lease, the base value of the car can be reduced by one third. Hence, increasing the average lease
length by one year causes the estimate of the indirect carbon price to increase by 20%.

What if the typical EV cost more than $50 000?
Our estimates implicitly assume a $50 000 EV price, which is assumed in Treasury estimates of the financial
impact of the policy (Chalmers 2022). However, there are currently very few EV models available in Australia
for less than $50 000. The recommended retail price for the entry-level model of Australia’s highest selling
EV — the Tesla Model 3 — is $65 500. Using this figure instead increases the indirect carbon price by 30%.
The threshold for being eligible for the FBT exemption is $84 916, using this figure results in an indirect
carbon price that is 69.8% higher than the indirect carbon price based on a $50 000 EV. Alternatively, if theaverage EV price fell to $40 000, the indirect carbon price would be 20% lower.

What if the average new ICE-powered vehicle is more efficient?
The base model assumes that the typical ICE-powered vehicle emits 146.5 g of CO2-e per km. This was theaverage emissions intensity of new passenger vehicles in Australia in 2021. If the emissions intensity of newpassenger vehicles was to fall to by 10%, the estimated indirect carbon price would increase by 15.5% at thelower bound.

A.2

State EV policies

The states also have a suite of policies designed to incentivise the uptake of EVs (table A.3). We haveestimated indirect carbon prices for three types of policies — upfront subsidies or rebates, stamp duty
exemptions or discounts and registration exemptions or discounts. The cost of each policy per EV has been43

5-year Productivity Inquiry: Managing the climate transition Inquiry reportaggregated by state because the policies are complementary rather than exclusive. That is, buyers making
use of one policy can also make use of the others. As with the estimates related to the FBT exemption, an
EV value of $50 000 has been assumed.
Table A.3 – State and Territory EV policiesa,bUpfront subsidy

Stamp duty

Registration

or rebate

discount/exemption

discount/exemption

$3000

$1600

-

Victoria$3000-$100 per year

Queensland

$3000

$500

$74.5 per year

South Australia

$3000

-

$138 per year for three years

-

$2000

-

State or Territory
New South
Wales

Tasmania

Sources: NSW Government (2022); DELWP (2021); Queensland Government (2022a, 2022b, 2022c) TCCO (2021);
Department of Treasury and Finance (2022); Department for Energy and Mining (2022); Government of South Australia (2021);
DWER (2021); Fisk (2021).

Upper and lower bound estimates of the indirect carbon price have been calculated in the same way as they
were for the FBT exemption. The main difference is the minimum bring-forward dates, which have been set
at the scheduled or likely end date (for quantity limited subsidies) for the highest value subsidy offered by thestate or territory. For simplicity, the forecast emissions factors associated with consumption of purchased
electricity or loss of electricity from the grid that were used were the same as those used to estimate theindirect carbon price associated with the FBT exemption. This effectively assumes that each state follows thesame emissions reduction path within the electricity sector. While this is unlikely to be the case, changing
this assumption would have only small effects for each state, particularly given that the listed states arelinked to the NEM. The indirect carbon price associated with each state policy is high compared with otherabatement measures but not as high as the indirect carbon price associated with the Commonwealth FBT
exemption for EVs (box 4.2) because the tax expenditure is lower (table A.4), though the lower value ofthese concessions reinforces questions about the likely additionality of these policies.
Table A.4 – Indirect carbon prices for State and Territory EV policies
State or Territory

Cost over 15 years

Indirect carbon price ($/tonne CO2-e)

New South Wales$4600$271–4,914

Victoria$4500$287–4,807

Queensland$4617$282–4,933

South Australia$3414$209–3,647

Tasmania$2000$134–$2,137

Source: Productivity Commission estimates.

A.3

Fuel excise discounts

Domestically produced ethanol and biodiesel attract discounted rates of excise duty and composite fuels
made using ethanol and biodiesel have a lower emissions intensity (table A.5).

44

Indirect carbon price estimation

Table A.5 – Excise rates and emissions intensities for fuels
Scope 1 emissions

Lifecycle emissions

Excise ratea

intensity (kg/CO2-e/litre)intensity (kg/CO2-e/litre)

Petrol

0.442

2.38

3.02

Ethanol

0.145

0.06

1.94b

E10

0.412

2.15

2.91

Diesel

0.442

2.72

2.92

Biodiesel

0.088

0.09

0.60

B20

0.371

2.19

2.46

a. Discounted excise rates apply only to domestically produced ethanol and biodiesel. b. Lifecycle emissions intensity
estimates for ethanol were calculated using a weighted average of lifecycle emissions of wheat, sorghum and molasses
because an estimate for the lifecycle emissions intensity of barley, which accounts for 9% of ethanol production inAustralia, was not available.
Sources: Productivity Commission estimates based on DISER (2021b); PC (2011); PC (2022); USDA (2020).

The indirect carbon price associated with the discounted rates of excise duty can be estimated as follows:
𝐸𝑋𝑝 − 𝐸𝑋𝑒× 1000
𝐸𝑀𝑝 − 𝐸𝑀𝑒
𝐸𝑋𝑑 − 𝐸𝑋𝑏
× 1000
𝐸𝑀𝑑 − 𝐸𝑀𝑏
where:• 𝐸𝑋𝑝 indicates the excise rate for petrol••••

𝐸𝑋𝑒 indicates the excise rate for ethanol
𝐸𝑋𝑑 indicates the excise rate for diesel
𝐸𝑋𝑏 indicates the excise rate for biodiesel
𝐸𝑀𝑝 indicates the emissions intensity for petrol• 𝐸𝑀𝑒 indicates the emissions intensity for ethanol• 𝐸𝑀𝑑 indicates the emissions intensity for diesel• 𝐸𝑀𝑏 indicates the emissions intensity for biodiesel.
The scope 1 emissions intensity was used to estimate a lower bound, while the lifecycle emissions intensity
was used to estimate an upper bound. The estimated indirect carbon price for E10 is $127.91–273.66 andfor B20 is $134.55–152.02 (table A.6).
Table A.6 – Indirect carbon prices for biofuels
Indirect price (scope 1 emissions)Indirect price (lifecycle emissions)E10

127.92273.65B20

134.55152.02

Source: Productivity Commission estimates.

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5-year Productivity Inquiry: Managing the climate transition Inquiry report

A.4

Renewable energy target

The renewable energy target (RET) has two components, the large-scale renewable energy target, backed
by large-scale generation certificates (LGCs) and the small-scall renewable energy scheme, backed bysmall-scale technology certificates (STCs). The RET aimed to achieve 33 000 gigawatt hours of additional
electricity from large-scale renewable sources by 2020 — equivalent to 20% of energy supply. That target
was reached in September 2019 and is now being maintained through until 2030.
This section estimates the indirect prices associated with the RET up until 2020. The period after 2020 is notconsidered because — with the target having already been met — it is unlikely that new generation could beconsidered additional. The Commission (2011) has previously estimated the indirect price — or indirectabatement subsidy — associated with both the LGC and STC schemes.

Large-scale generation certificates
The Commission (2011) estimated the indirect carbon price associated with LGCs using both the ‘spot’ price($37.03 at the time) and the long-term contract price. The long-term contract price was not readily available
and hence was estimated as the price needed to induce wind generation to enter the market ($60).
Since then the economics of electricity generation have changed, with renewables now having a lower levelised
cost of energy than coal (Bleich and Guimaraes 2016, p. 6). This finding is also true domestically, with each of
CSIRO’s GenCost reports identifying renewables as the lowest cost ‘new build’ (Graham et al. 2018, 2020, 2021,2022). Consequently, we have adjusted our methodology and only estimated indirect carbon prices based on the‘spot’ price. As of 5 September 2022 the price of an LGC was $59.50 (Northmore Gordon 2022).
The Commission (2011) used three emissions intensity factors to estimate a range of indirect prices. The
average emissions intensity of the grid (0.92) was used for the central estimate, while the weighted-average
emissions intensity factor for coal generation (1.00) was used for the lower bound estimate and theemissions intensity factor for gas generation (0.54) was used for the upper bound estimate.
Currently, the average emissions intensity factor of the non-renewable component of the grid is 0.87. The
weighted-average emissions intensity factor of coal generation is 0.99 and the emissions intensity factor forgas is 0.54. The emissions intensity factor of the non-renewable component has decreased because gas
makes up a larger share than it did in 2011. The emissions intensity factor of coal generation has decreased
because black coal makes up a larger share of coal production relative to brown coal than in 2011.
The indirect carbon prices are calculated using the following formula:
𝐿𝐺𝐶 𝑃𝑟𝑖𝑐𝑒
𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐹𝑎𝑐𝑡𝑜𝑟
The central estimate is $68 per tonne of CO2-e, with a range of $60–110.

Additionality
The Commission (2011) took the view that all LGCs were additional — that is, the renewable energy
generation would not have occurred in the absence of the policy — because, at the time, the cost of
renewable energy generation was far greater the non-renewable generation. That is no longer the case. The
cost of renewables has fallen faster and further than expected and as of 2016 was less than the cost of fossil
fuel generation (Bleich and Guimaraes 2016, p. 6; Graham et al. 2018, 2020, 2021, 2022). Hence, it is likelythat not all renewable energy generation installed after 2016 was additional. That is, some of the generation
installed would likely have been installed even in the absence of LGCs.

46

Indirect carbon price estimation

In 2016, approximately 17 500 gigawatt-hours of renewable energy that counted towards the large-scale
component of the RET was generated — 53% of the 2020 target (CEC 2017). Taking the extreme view thatnone of the generation installed after 2016 was additional, we can calculate a lower bound estimate ofadditionality. If the additionality of LGCs was only 50%, the estimated indirect carbon price would rise by
100% to $136, with a range of $120–220.

Small-scale technology certificates
STCs differ to LGCs in that certificates accounting for 15 years’ worth of abatement (fewer years if thetechnology was installed post-2016) were created upfront and those certificates could be sold to retailers
immediately. This policy can be thought of as a capital subsidy. The subsidy equivalent has been estimatedas equal to what it would have cost a private actor to fund investment in the technology in the absence of thepolicy. To estimate an indirect carbon price it is best to think in annual terms, hence the cost of the policy has
been transformed into equivalent annual cost terms. This conversion relies on the following formula:
𝑆𝑇𝐶𝑡 × 𝑃𝑡𝑆𝑇𝐶
1 − (1 + 𝛿)−𝑛where:••••

𝑆𝑇𝐶𝑡 refers to the number of certificates issued in year 𝑡
𝑃𝑡𝑆𝑇𝐶 refers to the price of STCs in year 𝑡
𝛿 refers to the discount factor
𝑛 refers to the economic life of the asset.

The Commission (2011) used three discount factors (3%, 7% and 11%) as well as varying the emissions
intensity of the electricity replaced (as described above) to estimate a range for the indirect carbon price. We
have adopted the same approach and used the 2015 STC data to inform our estimates (table A.7).
Table A.7 – STC indirect prices
Discount rate

Lower boundCentral estimate

Upper bound

3%

$41

$46

$75

7%

$57

$65

$105

11%

$76

$86

$139

Sources: Productivity Commission estimates based on Clean Energy Regulator (2022b, 2022a); PC (2011); Northmore
Gordon (2022).

The generation eligible for STCs was not wholly additional because of overlaps with state and territory
feed-in-tariffs. The state and territory policies affected the indirect carbon price of solar photovoltaic
generation specifically (PC 2011, p. 83). This issue has not been addressed in these estimates.
Of all STCs created between 2011 and 2020, 43% were issued after 2016. Hence, and to be consistent with our
LGC estimates, we have used an additionality parameter of 50% to provide a lower bound for the indirect priceassociated with STCs. Doing so increases the estimated indirect carbon price by 100%. That is, the central
estimate using a 7% discount rate is $129, with a range of $114–209.

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5-year Productivity Inquiry: Managing the climate transition Inquiry report

A.5

NSW Energy Savings Scheme

The NSW energy savings scheme requires certain entities to obtain and surrender energy savings
certificates (ESC). Certificates represent one notional megawatt hour (MWh) (Kean 2022). Accredited
certificate providers receive certificates in accordance with the following formula:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑐𝑎𝑡𝑒𝑠= ∑(𝑒𝑙𝑒𝑐𝑡𝑟𝑖𝑐𝑖𝑡𝑦 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 × 𝑒𝑙𝑒𝑐𝑡𝑟𝑖𝑐𝑖𝑡𝑦 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑓𝑎𝑐𝑡𝑜𝑟+ 𝑔𝑎𝑠 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 × 𝑔𝑎𝑠 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑐𝑎𝑡𝑒 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑓𝑎𝑐𝑡𝑜𝑟)
The indirect price estimated reflects electricity savings only. It is calculated as the penalty rate, which reflects
the upper bound for covered entities, divided by the emissions intensity factor and multiplied by the electricity
conversion factor (1.06) to transform the price into dollars per tonne of CO2-e.
𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝐶𝑎𝑟𝑏𝑜𝑛 𝑃𝑟𝑖𝑐𝑒 =𝑃𝑒𝑛𝑎𝑙𝑡𝑦 𝑅𝑎𝑡𝑒× 𝐸𝑙𝑒𝑐𝑡𝑟𝑖𝑐𝑖𝑡𝑦 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐹𝑎𝑐𝑡𝑜𝑟
𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐹𝑎𝑐𝑡𝑜𝑟

Similar to previous estimates, our estimates consider only scope two emissions and three intensity factors
were used to estimate a range of indirect carbon prices: the average emissions intensity of electricity
generation in New South Wales, which represented a central estimate and then the emissions intensity ofcoal generation (an upper bound) and the emissions intensity of gas generation (a lower bound). The
emissions intensity factor for coal generation is 0.99 and resulted in a indirect price of $32 per tonne. The
average emissions intensity factor for electricity generation in New South Wales in 2019-20 was 0.78 andequated to an indirect price of $41 per tonne (DISER 2021b). The average emissions intensity factor for gas
production is 0.54 and equated to an indirect price of $59 per tonne.
Victoria has a similar system where certain entities are required to purchase Victorian energy efficiency
certificates (VEECs). VEECs are measured in tonnes of CO2-e, hence, no transformation is required. As of
5 September, one VEEC cost $69 in the spot market (Northmore Gordon 2022). It is possible that thelong-term contract price is lower than the ‘spot’ price.

48

Abbreviations

Abbreviations
ACCU

Australian Carbon Credit Unit

AEMO

Australian Energy Market Organisation

BEV

Battery Electric Vehicle

CIS

Capacity Investment Scheme

CBAM

Carbon Border Adjustment Mechanism

CBT

Carbon Border Tariff

CCS

Carbon Capture and Storage

CO2

Carbon dioxide

CO2-eCarbon dioxide equivalent

CPM

Carbon Pricing Mechanism

CER

Clean Energy Regulator

EU

European Union

EITEI

Emissions-Intensive Trade-Exposed Industry

ERF

Emissions Reduction FundETS

Emissions Trading Scheme

EV

Electric Vehicle

FBT

Fringe Benefits Tax

ICEInternal Combustion Engine

ISP

Integrated System Plan

LGC

Large Scale Generation Certificate

Mt

Megatonne

NEM

National Electricity Market

NGERS

National Greenhouse and Energy Reporting Scheme

PHEV

Plug-in Hybrid Electric Vehicle

RET

Renewable Energy Target

SM

Safeguard Mechanism

STC

Small Scale Technology Certificate

VEEC

Victorian Energy Efficiency Certificate

VPP

Virtual Power Plant

49

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Report no. 100 – 7 February 2023

5-year Productivity Inquiry:
A more productive labour market
Inquiry report – volume 7i5-year Productivity Inquiry: A more productive labour market Inquiry report

The Productivity Commission acknowledges the Traditional Owners ofCountry throughout Australia and their continuing connection to land,
waters and community. We pay our respects to their Cultures, Country
and Elders past and present.

The Productivity Commission
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and advisory body on a range of economic, social and environmental issues affecting
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Publication enquiries:
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ii

Contents

Contents
Prefacev

1.

Improving productivity in a challenging labour market

1

1.1

The matching and use of skills in the labour market

1

1.2

Where we have focused

11

2.

3.

4.

5.

Improving productivity through migration

13

2.1

Policy objectives and trade-offs

14

2.2

Strengths and weaknesses of the current system

23

2.3

A better targeted migrant intake

36

2.4

Abolish business visas

36

2.5

Replace skill lists

37

2.6

Using income levels as benchmarks and thresholds

38

2.7

Reforming the points-based system

42

2.8

Meeting employment needs in human services and care work

45

2.9

Temporary migration and pathways to permanent residency

47

2.10 Avoiding backlogs where possible

51

2.11 Removing barriers that migrants face in the labour market

51

Occupational licensing and registration

59

3.1

Licensing and productivity

60

3.2

Is licensing the best way of improving safety?

66

3.3

Addressing boundary issues and scope of practice

76

3.4

Laying the foundations for better occupational licensing design85

Effective workplace relations

93

4.1

An evolving workplace relations environment

94

4.2

Awards are growing in policy significance

95

4.3

More efficient enterprise bargaining

112

Platform work and the gig economy

133

5.1

Introduction

134

5.2

The upsides of platform work

136

iii

5-year Productivity Inquiry: A more productive labour market Inquiry report

5.3

Regulatory challenges relating to minimum pay and conditions in Australia

140

5.4

Improving dispute resolution between platforms and workers

158

5.5

Platform work and safety

163

Appendix

177

A.

179

Stylised simulations of economy-wide effects

Abbreviations

185

References

189

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iv

Preface

PrefaceA well-functioning labour market is critical to productivity growth and social wellbeing.
At a conceptual level, this relationship is simple: the easier it is for firms to meet their skill needs and employ
productive work practices, the better they are placed to respond to commercial opportunities, innovate, adopt
technology and improve asset utilisation. And the more firms compete for productive workers, the more
people can find work, move jobs, upskill, and receive better pay and conditions.
But the reality of achieving these objectives — particularly in an advanced and dynamic economy — is much
more complex. Labour market policy involves a unique set of economic, ethical and social challenges. It
exists within the context of a unique regulatory framework — a product of history as much as design.
Policy must also reflect prevailing conditions. Full employment is a welcome development but presents
challenges in the immediate term. It highlights the importance of having people in jobs that best use theirskills and expertise at a time when people are changing jobs less often.
Reforms could provide broad and enduring gains within a challenging and volatile landscape.
First, increasing the supply of appropriately skilled workers will be key, as will improving matching
between skilled workers and jobs in the labour market.
• Education and training play a significant role in ensuring that students obtain skills that are valued in thelabour market (discussed in volume 8).
• Skilled migration makes a strong contribution to productivity through an inflow of skills, ideas, and innovation
into the labour market. The composition of the migrant intake could be better targeted to avoid mismatches
between skills and labour market needs, and to improve the fiscal impacts of skilled migration.
• Occupational licensing, while playing an important role in setting minimum standards for training andexperience, also restricts skilled labour supply if settings are overly stringent.
Second, productivity will improve where businesses are able to introduce innovative and efficient work
practices that enhance the value of employees. As more employers compete for more productive
workers, wages rise and resources flow to more productive areas of the economy.
• The workplace relations system can be improved to support innovation and better job-matching within
enterprises. Making modern awards simpler, more flexible and streamlined would not only reducecompliance costs and the scope for non-compliance but also foster innovation. Removing barriers toeffective agreement-making would generate productivity gains through efficient labour use and innovation.
• Platform-based business models can contribute to productivity growth, including through new and more
efficiently delivered services. Fit-for-purpose safety and other measures would support gig workers without
stymying the benefits of the business model.
• In the context of occupational licensing, scope of practice settings that are unduly restrictive can prevent
workers from applying the full extent of their skills and capabilities.

v

Improving productivity in a challenging labour market

1.

Improving productivity in achallenging labour market

Key points
A well-functioning labour market is a critical contributor to productivity growth, particularly through thematching of jobs and people with appropriate skills and know-how.
• The quality of skills and the matching of skills and jobs in the labour market are essential for productivity andeconomic growth. Where policy levers influence labour supply — such as in migration policy, or restrictions
associated with licensing — the composition of the labour force and the quality of skills are more directly
relevant to productivity than the size of the increase in participation.
• The effect of participation on productivity is complex, and is driven, in part, by the skills composition of newlabour market participants. Removing barriers or disincentives to labour supply can contribute to productivity
growth if it leads to better jobs and skills matching by expanding the pool of available skills.
Productivity is also dependent on efficient work practices and the movement of higher performing
workers to more productive firms.
• The decline in job mobility is likely due to a number of factors, including dynamism in product markets,demographic change, and worker preferences.
• The design of the workplace relations (WR) system can affect many factors directly relevant to productivity —investment, wages, decisions about how to organise firms, and the degree of competition between employers
in the labour market.

This chapter describes some of the key challenges for governments arising from today’s labour market,
including the matching of skills and jobs in the labour market; and the productive use of skills and labour
resources. It then provides a guide to the remaining chapters of this volume.

1.1

The matching and use of skills in the labour market

The efficiency of the supply and matching of skills and jobs in the labour market is critical for productivity.
The more easily firms are able to meet their skill needs, the more easily they can respond to commercial
opportunities and improve asset utilisation. This requires appropriate skills to be available in the economy —a function of education, on-the-job training, migration, and workforce participation.
Productivity also depends on the movement of people between jobs — to higher performing firms or tasks
within firms, to jobs in different locations or to jobs that better match their skillset and capabilities. In a1

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportcompetitive labour market, more productive employers would compete for skills and talent in the labour
market by raising wages, thereby allocating labour resources to their most productive use.
It is also important that firms are able to employ efficient work practices so that employees’ capabilities areused to their full extent.

Labour productivity and participation
The productivity of labour has played a dominant role in driving real increases to income levels over the past
60 years (figure 1.1). Increasing labour utilisation — which measures the effect of workforce participation,
unemployment and average working hours — also played a significant role in driving income levels in the
1960s and 1980s, as did a rising terms of trade, driven by global demand for commodities during the mining
boom. But neither has made as sustained a contribution as labour productivity growth.
Trends in labour productivity and workforce participation reflect the transformation of Australia’s labour
market. Since 1970, Australia’s employment to population ratio has moved from below the average to above
the average in the OECD, rising to 51% in 2019, primarily due to an increase in the participation of women in
the workforce over the past 40 years. Despite a net increase in participation, on a per capita basis, employed
Australians work 10% fewer hours (a decline of four hours per day) compared with 50 years ago.
One implication is that if productivity growth is slow, the associated drag on economic growth could
theoretically be offset by increases in labour supply. However, sustaining an ever-increasing share of people
in the workforce (and maintaining their income levels), is neither possible nor desirable. People value leisureand there are many unpaid activities that are socially valuable.
On the other hand, changes to labour force participation can influence productivity in either positive or
negative ways. Productivity growth occurs when more output is generated per unit of input, and hence
increasing the quantity of inputs is not necessarily a way to improve productivity. This is because, at somehigh level of labour participation, new entrants have on average fewer skills than people with strong
footholds in the labour market. Some empirical evidence suggests that there is a trade-off between
productivity growth and labour participation that is influenced by demographic and cohort effects (Boulhol
and Turner 2009; McGuckin and van Ark 2005). On the other hand, if highly productive workers are not in
the labour market or are working in a lower capacity than their skills and expertise would allow, thenremoving any barriers to their increased participation would contribute positively to productivity growth.
Labour scarcity, which arises when vacancy rates are high and persistent, also can promote productivity:• Labour scarcity provides businesses with incentives to find more efficient ways to use their workforce,
including by investing in productivity-enhancing capital.
• As businesses compete for better skilled workers in a tight labour market, this allows resources to flow tomore productive areas of the economy, promoting overall productivity growth.

2Improving productivity in a challenging labour market

Figure 1.1 – Labour productivity and participation have each contributed to real growth
in incomes
a. Labour productivity as a key driver of real growth in average national incomes
3.5

Percentage point contribution

3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5

1960 to 1970

1970 to 1980

Labour productivity

1980 to 1990

Labour utilisation

1990 to 2000

Terms of tradeb. Employment to population ratioa

2000 to 2010

Net foreign income

2010 to 2020

GNI per capita

c. Average weekly hours per workera

0.8

0.8

50

50

Luxembourg

0.7

0.7

0.6

0.6

US

Ireland

Mexico40

0.5Australia
Average35

0.4Minimum

0.3

Turkey

0.2
1980

1990

2000

2010

2019

35

US

0.4

0.2
1970

45

Australia
Average

0.3

Korea

Maximum

40

Maximum

0.5

45

Sweden30
Minimum

25
1970

30
Netherlands

Denmark

25
1980

1990

2000

2010

2019

a. OECD membership has changed over time. To reflect this, the group of countries included in the ‘OECD’ calculations

here changes based on the nearest decade at which the country ratified membership.
Source: PC (2022a).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

In general, changes in the supply of labour can contribute to productivity through: increasing the supply ofvalued skills (or of employees with the needed characteristics); facilitating the upgrading of the workforce,
including through training and education (discussed in volume 8); and/or improving labour market
matching between the existing supply of employees with the firms’ demands.1
This would suggest that removing barriers or disincentives to labour supply can contribute to productivity
growth if it leads to better jobs and skills matching by expanding the pool of available skills.
One example relates to differences between the number of hours a person wants to work and their actual
hours worked. This type of mismatch can affect productivity, particularly if people face a trade-off between
jobs that offer suitable (or flexible) hours and jobs that make better use of their skillset — for instance, if
flexible hours were less available at senior positions.2 Flexible working arrangements (such as
working-from-home) can be used to reduce such mismatches. They may also be reduced in the longer term
if the overall decline in average working hours were to continue. There is also scope for governments toadjust tax and welfare policies to provide additional incentives for people in certain circumstances to moreclosely align their actual hours of work with their preferred hours (box 1.1).
Similarly, immigration into Australia can promote productivity growth, particularly where it contributes to the
supply of valued skills, and diffusion of knowledge from overseas. Migration settings themselves can improvelabour market matching by influencing the composition of the migrant intake. Where migration does notincrease the supply of valued skills or improve labour market matching, increased migrant workers may
simply add to workforce participation rather than enhance productivity growth.
Labour mobility is also a key factor in labour market matching, and hence with growth in wages3 andproductivity. Moving between jobs is beneficial where people and jobs are better matched. At the same time,labour mobility entails various costs for both employees and employers.4 While it is typically not possible toidentify an optimal level of mobility, unnecessary barriers to labour mobility cause both employers andemployees to forgo benefits.

1 Adapted from the framework outlined by Criscuolo et al (2021a, p. 42) in their OECD Working Paper, described as ataxonomy of policy for ‘spurring productivity growth’.
2 Where increased participation does not improve the supply of skills or labour market matching, it is less likely to contribute toproductivity, and hence less in the scope of this report (although may still contribute to other policy objectives).
3
Labour or job mobility allows workers to take up new jobs offering more attractive pay or conditions. In the presence ofhigh labour mobility, wages may rise even for workers who do not move jobs — given the ‘prospect of credible job offers’
and its effect on workers’ bargaining power. (Deutscher 2019)4 Some workers may prefer job security. Switching to another job can incur adjustment costs as employees need time toadapt to new responsibilities and tasks, and may require employers to incur training costs, recruitment costs and the lossof institutional knowledge. In addition, where there is forced mobility, the benefits to workers and to productivity would
depend on the existence of suitable alternatives — this may take time to realise and entail costs for those in frictional or
structural unemployment.
4

Improving productivity in a challenging labour market

Box 1.1 – The influence of the tax and welfare system on labour supply
Tax and welfare policies can have a direct bearing on incentives to work. Effective marginal tax rates(EMTRs) measure the loss resulting from income taxation combined with the withdrawal of transfer
payments or income supplements that are associated with earning an extra dollar of income. HighEMTRs present a strong disincentive to increase work hours.
A number of submissions to this inquiry have highlighted how the tax and welfare system can affect work
decisions, particularly for parents who receive childcare subsidies and other means-tested income
support payments, such as parenting payments or family tax benefit part A or B.
Availability of affordable, high-quality ECEC [early childhood education and care] services isfundamental to the ability of individuals with childcare responsibilities to work the maximum
number of hours that they would like to work. It is central to Australia’s ability to improve
productivity. (KPMG, sub. 60, p. 17)
The cost of childcare combined with additional taxation and loss of family benefits means thatfor many women there is little or no financial benefit from increasing their paid work beyond
three days a week. (Grattan, sub. 37, attachment 1, p. 34)
For some people, the choice to provide care to young children or other family members in lieu of paid
work is a reflection of personal preference. For others, choices about care, workforce participation, andhours of paid work are influenced by the tax paid on additional hours worked and the rate of government
assistance received (which can decline as household income rises).
Reducing effective marginal tax rates is not straightforward. High EMTRs arise largely as a result ofmeans-testing, which itself is a desirable characteristic of transfer policy design. In addition, any reform
to EMTRs is complex, given that they vary with individual or household income and by family type.
The Productivity Commission has previously noted that the interaction of tax and welfare policies provide
powerful disincentives for many second income earners to work more than part-time (PC 2014a). While
early childhood education and care is just one of a broad range of work, family and financial factors that
influence parent work decisions, it is one factor that is within the influence of government.
From a productivity perspective, benefits may accrue if the use of care services enables a better
matching of parent skills to jobs, or if there are people with highly valued skills who are willing andenabled to increase their hours of workforce participation.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Effective marginal tax rates vary with household income structure
Sole parent with 1 child aged 6

Secondary earner in a couple with 1 child aged 6a

100

100

80

80

60

60

40

40

20

20
0

0
0

20
40
60
80
100
120
Primary earner income (thousand $)Income support (PPS)Family Tax Benefit B
Income tax
LITO

Family Tax Benefit A
Medicare levy
SAPTO
EMTR effective tax

0

20
40
60
80
100
120
Secondary earner income (thousand $)Income support (JSP)
Family Tax Benefit B
Income tax
EMTR effective tax

Family Tax Benefit A
Medicare levy
LITO

a. Primary earner income fixed at $40 000.
Source: Unpublished Treasury data.

Recent shocks to the availability of skills and labour
The COVID-19 pandemic severely disrupted global and intra-Australian migration patterns, with internationaland state and territory borders closed for prolonged periods of time. International borders remained closed
even as Australia’s economic recovery began in earnest (figure 1.2). This led to relatively strong growth inboth employment and job vacancies, as well as historically low levels of unemployment in mid-2022. Labour
scarcity increased in sectors (such as hospitality) that typically rely heavily on migrant workers, but also
bodes poorly for the availability of workers in some other sectors in the future — for example, in the context
of rising demand for services such as aged care (CEDA 2021a, 2021b). While the efficient allocation oflabour is always important, it has become even more so as unemployment has declined.
Globally, migration patterns have yet to return to pre-COVID norms (DAE 2022). For Australia, enrolment
levels for international students have begun to rebound (figure 1.2, panels b and c) while temporary skilledmigration is being used to a much lesser extent than in previous periods of low unemployment (such as
during the mining boom) (CEDA 2022a).
While migration is likely to recover, it is not guaranteed that Australia will retain its attractiveness to working
migrants. Importantly for productivity, this could have significant implications for the composition of the
migrant intake — Australia will need to compete to attract workers whose skills meet local demands, who areyounger, and who bring valuable knowledge and innovations from overseas. Some indicative estimates ofthe potential productivity implications of migration are included in appendix A.
In addition, the health impacts of COVID-19 could have ongoing implications for labour supply and,potentially, to productivity growth over coming years. Extended periods of physical fatigue and cognitive
disfunction are the most commonly reported symptoms of ‘long-COVID.’ Treasury estimates suggest about
31 000 people missed work due to long COVID each day in June 2022 (Moore 2022). However, in addition

6

Improving productivity in a challenging labour market

to absenteeism, it remains to be seen whether such symptoms will also result in people performing lower
duties — making less use of their skills and capabilities.
Figure 1.2 – International borders remained closed as economic activity crashed andrecovereda. Economic activity and employment
550

13 400530

13 200
13 000GDP (LHS)

490

12 800470

12 600450

12 400

Employment (RHS)430

12 200

Closure of Australia's
international borders

410

11 800370

11 600350

11 400c. Permanent migration

700
600

300

Student

500
400
300

250

Visas granted ('000)

Visa holders ('000)

12 000390

b. Temporary migration

Employment (no.)

GDP ($ billion)

510

Bridging

200

Permanent additions

200

150

Settler100
OnshoreTemporary skilled

50

100Working holiday<50Sources: ABS (2022b); DoHA (2021b, 2022c).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Declining labour mobility could inhibit better matching
Over the past 30 years, Australians have become less inclined to change employers (figure 1.3). Black andChow (2022) note that ‘job mobility’ tends to change according to the business cycle (although recessions
may also precede structural changes in the economy, with ongoing implications for the labour market). And
while job mobility could intuitively be influenced by labour market conditions (such as the availability ofalternative job options) both labour mobility and unemployment have experienced declining trends over the
past 30 years. More recently, job mobility is likely to have been affected by the COVID-19 pandemic, boththrough disrupted economic activity as well as support programs that encouraged continued attachment
between employers and furloughed employees.
However, job mobility is not only a function of economic circumstances — demographic factors are also
influential. Job mobility for people aged 15–19 and 20–24 years was significantly lower following the GFC,
and declined more significantly than for older age groups in the past 20 years (figure 1.4, panel a). Despite
the decline, Black and Chow find that:
Typically, younger workers have higher rates of job switching than older workers. This is because
young people have less firm- and industry-specific human capital than more experienced older
workers and so have more to gain by changing jobs and increasing the quality of a job match; an
example of this is a university graduate who switches from casual employment to a full-timecareer in an industry related to their studies.
Figure 1.3 – The relationship between job mobility and unemployment has varieda
Share of employees who changed employers in the last twelve months; unemployment rate20

Per cent

16

12

8

4

0
1972

1977

1982

1987

1992

1997

2002

2007

2012

2017

2022

Labour mobility rate

Labour mobility rate (male)Labour mobility rate (female)

Unemployment rate

Unemployment rate (male)

Unemployment rate (female)a. Data collection is not uniform between 1980 and 2021 — as such, some points are interpolated. Labour mobility data
was not available for 1993, 1995, 1997, 1999, 2001, 2003, 2005, 2007, 2009, 2011 and 2014.
Source: ABS (2022c).

8

Improving productivity in a challenging labour market

Job mobility has consistently been higher for people aged 15–24 years compared with older age groups(figure 1.4, panel a). However, younger people have comprised a declining proportion of the workforce over
several decades (figure 1.4, panel b). This reflects population ageing, higher rates of tertiary education, anda significant increase in participation for those aged 45 years and older.
It is unclear how labour mobility will fare in the medium or long term. Structural factors such as population
ageing suggest that the baseline level of labour mobility may be lower than in previous decades. Conversely,
historically low levels of unemployment and high job vacancy rates may increase mobility in a ‘buyers’ market’.
And the increased use of remote work will reduce geographic barriers to labour mobility for some occupations.
Some barriers to mobility may have worsened in recent years — for example, factors such as housing
availability can weigh on geographic labour mobility, particularly the movement of workers into areas where
job opportunities are expanding but where housing options are limited and expensive relative to incomes. As
noted in the Productivity Commission’s (2014b, pp. 22–23) report on Geographic Labour Mobility, housing
supply could be improved in part by removing or significantly reducing inefficient housing-related taxes suchas stamp duties, as well as relaxing unnecessarily restrictive planning and zoning measures.
Figure 1.4 – Mobility partly reflects ageing of the workforce
b. Age composition of employed persons over time

8%

3500

7%

3000

5%
4%
3%
2%

2500
2000
1500
1000

15-19
35-44

20-24
45-54

2022

2020

2018

2016

2014

2012

2010

2008

0

2006

0%
2004

500

2002

1%

1978
1981
1984
1987
1991
1994
1997
2000
2004
2007
2010
2013
2017
2020

6%

Persons ('000)

Job mobility (%)

a. Job mobility by age

25-34

15-19

20-24

25-34

55+

35-44

45-54

55+

Sources: ABS (2022b); ABS (2022d).

Trends in labour mobility will be determined in part by trends in competition and dynamism in product andservice markets. As more firms enter a given product market, they provide new opportunities in the labour
market. In addition, a greater degree of competition between firms allows more productive firms to gain
market share and to expand their operations. As less productive firms exit, this should allow people to shift towhere they are more valued and better utilised.
Regulation can also influence the allocation and utilisation of skills in the labour market. For instance,
occupational licensing acts as a signal of proficiency and the quality of work output to employers andconsumers, reducing information asymmetries. However, in some cases, occupational licensing is used
inappropriately to limit entry into a market. For example, by requiring additional licences to perform the same9

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

work in different geographic locations or to create boundary limitations on the tasks an otherwise proficientindividual is able to complete.
These types of restrictions do not confer any public benefit and removing them would increase productivity
through more efficient labour market allocation. This is particularly important when there are pre-existing
constraints on labour supply that arise from a labour market in full employment. Some indicative modelling of
the potential productivity implications of occupational licensing reform are included in appendix A.

The productive use of skills and labour
Workplace relations regulation has a bearing on both the use of efficient practices in the workplace and theallocation of more productive resources to more productive firms (where employers compete in the labour
market). The different forms of wage setting will be relevant to different sections of the workforce. Eachposes potential costs and benefits to productivity.
Across all employees, minimum standards are set via the National Employment Standards (NES)(legislated through the Fair Work Act 2009 (Cth)) and the National Minimum Wage (centrally set by anindependent body). They have a broad scope of coverage and provide limited room for flexibility for
individual circumstances. While this level of centralisation is useful in prescribing a minimum standard, froma productivity perspective, it is important that other mechanisms exist alongside the NES to allow wages andconditions to meet more specific needs.
At the industry and occupation level, modern awards stipulate minimum conditions and wages that are
customised for specific industries and sometimes occupations. Modern awards are designed to coexist withenterprise and individual bargaining, such that parties can negotiate on employment terms above theminimum standard. Unique to Australia, awards effectively establish hundreds of minimum wage levels —across the more than 100 awards and within awards across multiple classification levels (above the wage
floor for the lowest paid). This method of centralised wage setting has several potential implications for
productivity (chapter 4), not least because they form the benchmark for minimum conditions that must be met
in any employment arrangement regulated under the Fair Work Act 2009 (Cth).
Individual level bargaining allows employers and individual employees to negotiate wages and conditions
above those set out in the NES, the relevant award, or applicable enterprise agreement. Individual
bargaining improves productivity by allowing more productive workers to attract higher wages, providing
incentives for workers to improve and demonstrate their efficiency. It also allows trade-offs to be made thatsuit the specific needs of the individual worker.
Collective bargaining at the firm level (for example, enterprise bargaining and greenfields agreements)
allows firms and their employees to negotiate wages and conditions according to their specificcircumstances. This provides a greater degree of flexibility than wage setting at the industry or sector level.
Bargaining at this level is likely to improve the matching between firms and workers, as more productive
firms can offer higher wages and better conditions to attract more productive workers. Moreover, it can be asource of innovation in determining new ways of working that benefit both employers and employees overall.
The efficiency of each wage setting processes also affects productivity, as bargaining processes requireresources that can be used elsewhere. As such, firms face a trade-off between the level of flexibility they canachieve through bargaining and the time and resources required. Reliance on modern awards removes costs
associated with the bargaining process, but allows less flexibility than bargaining and imposes other costs
that reflect their content and the ongoing processes for their amendment. Some indicative estimates of thepotential productivity implications of reforms to awards and enterprise bargaining are included in appendix A.

10Improving productivity in a challenging labour market

Challenges and opportunities posed by new forms of work
While platform work involves some challenges for workplace relations policy, it promises significant
productivity and other efficiency benefits emanating from better matching between consumers, greater
flexibility, higher quality on-demand services and gains in efficiency from more competition between firms.
Although there are regulatory challenges associated with platform work, policy should not seek to shoehorn
all platform workers as employees — which would risk reducing or removing key productivity benefits,
including labour flexibility — but to address issues in a proportionate manner.
Some policy ambiguities include whether platform workers are (or should be categorised as) employees,
uncertainties about the workplace responsibilities of platform owners for minimum pay and conditions orworkers’ health and safety, and lack of clarity about how disputes between parties could be effectively
managed. There are also some misapprehensions about the functioning and outcomes of the gig labour
market that have a bearing on appropriate regulation of this growing part of the labour market.

1.2

Where we have focusedThis volume of the Productivity Inquiry focuses on key labour market issues with significant implications for
productivity.
First, policy has a role in improving the supply of valued skills in the labour market, in part by ensuring the qualityof skills, and in part by reducing the misallocation of resources that occurs as a result of avoidable rigidities.
• The quality of education and training, both from education providers and through on-the-job training, canimprove the supply of needed skills (volume 8). Still, complementary policies can reduce underuse ofexisting skills.
• The composition of the migration intake is likely to be a significant policy issue for productivity. The
design of both the migration system and occupational licensing requirements can act as barriers toallocating and attracting labour to where it is most productive (chapter 2).
• The use of occupational licensing in Australia has implications for the quality of skills in the labour
market — through its role of setting minimum standards for training and experience, and its potential torestrict skilled labour supply if settings are excessively stringent (chapter 3).
Second, policy can improve the productive use of people’s skills.
• Australia’s workplace relations system will affect how work practices will evolve over time (chapter 4).
Recent developments in platform work present both opportunities for novel flexible work practices andchallenges for regulation (chapter 5).
• In the context of Australia’s occupational licensing systems, both the recognition of international
qualifications and boundary issues in scope of practice can have a significant bearing on the extent towhich workers are able to fully use their skills (chapters 2 and 3).
• Other factors that are likely to influence job mobility include the extent of competition and dynamism in
product and service markets (chapter 1, volume 3) and the business environment for investment,
particularly as it relates to market entry (chapter 2, volume 3).

11Improving productivity through migration2.

Improving productivity throughmigration

Key points
Australia’s skilled migration program already provides a significant productivity dividend. However,further refinement of its settings would improve productivity• Australia’s visa program streams make varying contributions to labour market outcomes and productivity. In
the past decade, the migrant intake has shifted toward visas that make relatively poor contributions. Given
the importance of labour market matching, policy should target quality.
• Skilled occupations lists are difficult to accurately construct and update, with doubtful value as a criterion forpermanent migration.
• Employer-sponsorship provides certainty of employment outcomes and should use high wage thresholds(and for permanent migration, age) as the key criterion for eligibility rather than skill shortages.
• The points-based permanent migrant stream can attract migrants with particular skills and characteristics, butneeds to be better matched to the needs of employers.
• All investor visas should be abolished as they impose net costs on Australians.
Addressing poor labour matching• Expanding default recognition of certain international licenses and aligning skilled migration requirementswith domestic occupational license recognition requirements would allow migrants to work in the high-skilledjobs they were trained for.
The most significant fiscal risks of migration relate to permanent rather than temporary visas• Temporary migration visas with longer and more certain durations would help workers and employers meettheir needs without requiring permanent migration.
• International students should have the expectation that they will be able to test their skills in the Australianlabour market after graduation, but this need not involve permanent migration.
Creating a safety valve for shortages in government-funded care services• Government fiscal pressures limit the capacity to raise wages to address the large and increasing shortages
in caring occupations, particularly aged care.
• To address shortages, a permanent migration scheme with a binding wage threshold should be piloted, but
be wound back if an alternative funding model that can sustainably support higher wages is implemented.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

There is significant scope to improve Australia’s migration settings to obtain large fiscal and productivity
benefits for existing citizens.
• A starting point for considering migration policy is clarifying the relationship between migration andproductivity in the context of other policy objectives (section 2.1).
• An assessment of the effectiveness of current policy settings suggests significant limitations in existing
policy settings (section 2.2).
• Temporary and permanent migration visas can be improved through enhanced targeting and better
pathways from temporary to permanent migration (sections 2.3–2.10).
• Some key barriers in the labour market specific to migrants can be reduced, including by recognisingoverseas qualifications (section 2.11). Addressing these issues would give policy makers a more accurate
understanding of how to target the migrant intake.

2.1

Policy objectives and trade-offs

Key objectives for productivity and wellbeing
Several economic and social policy objectives should be considered in setting migration policy within abroader framework of public wellbeing (primarily for the benefit of domestic citizens, although their interests
may coincide with those of migrants themselves) (box 2.1). Some benefits are intangible, including thecontribution of migration to ‘Australia’s standing as a member of the global community’ (John Quiggin,sub. 102, p. 5).
Through a productivity lens, migration is an important avenue for attracting skills and knowledge, allocating labour
to where it is most productive, and diffusing best practice from overseas. From a productivity lens, it is importantthat migration settings aim to improve the extent of matching of jobs and skills and produce fiscal benefits overmigrants’ lifetimes. Both objectives are heavily influenced by the migrants’ labour market outcomes.

Box 2.1 – How migration serves public wellbeing
Migration affects several aspects of wellbeing
Migration affects public wellbeing across a number of fronts. From an economic perspective, migration
affects the performance of the overall economy (such as more productive labour markets) and outcomesfor individuals (workers, employers and consumers).
Economic
objectives• Economy-wide
productivity• Spouse and family
bonds• Net fiscal impacts• Social cohesion
and community
wellbeing• Labour market
implications

14

Socialobjectives

International
obligations• Reciprocity• Humanitarian
responsibilities

Environmental
impacts• Population policy andthe management ofpublic infrastructure,
natural resources andurban planningImproving productivity through migration

Box 2.1 – How migration serves public wellbeing
Whose wellbeing matters?
At a basic level, migration policy aims to improve the wellbeing of the incumbent citizens. However, themigrant’s wellbeing is also relevant. Aside from being important in its own right, it is aligned with, and attimes, forms part of the broader public benefit.
• Discrimination or exploitation against migrant workers entail broader costs relating to legal and social
justice, concepts of fairness in workplace relations, the equitable nature of society, and the economic
distortions in the labour market. Exploitation is not merely a matter of the migrant’s wellbeing, but
broader public wellbeing.
• There is a dynamic aspect to the impact of migrants. Long-run benefits can be greater than short-run ones,
and any obstacles to successful transitions can forgo these. For instance, if a migrant’s career is impeded
during the early stages of their pathway to permanent migration, this reduces the benefits to Australia insubsequent periods. The labour market success of permanent migrants is in society’s interest.
There are also potential trade-offs between the benefit of migrants and citizens.
• In the labour market, competition can lead to higher quality output, but can put downward pressure on
wages. Broadly, this is more likely to benefit higher-skilled and higher-paid sections of the labour
market, where individual productivity can be rewarded accordingly. If, however, migration significantly
increases competition at the lower end of the income scale, and this exacerbates social exclusion ofincumbent Australians, this could be considered a poor outcome of migration settings.
• In the context of Australia’s tax and transfer system, everyone who participates in the economy (as aworker, consumer, employer or investor) has an impact on others. As such, all forms of migration has someform of fiscal impact, and the composition of the migrant intake will determine its overall fiscal implications.

Skills and job matching
One of the key productivity benefits of migration is that it contributes to the supply of highly valued skills,
changing the composition of skills in the labour market and improving matching between skills and jobs.5
In the short term, the inflow of skills allows businesses to pursue commercial opportunities as they arise. In
the medium term, businesses can adjust their investment plans and work practices based on the availabilityof skills in the labour market, which has been altered by different cohorts of migrants. In the longer term, theavailability and movement of labour resources are key factors in shaping how Australian economy evolves.

Complementarity and shortages
The extent of labour market matching depends largely on complementarity of skills. Conceptually, Borjas(1999) argued that migration is productivity-enhancing when migrants’ skills and capabilities arecomplementary to those of incumbents, leading to greater specialisation. This suggests that the implications
for productivity depend principally on the composition of the migrant intake, the incumbent labour force, andthe forms of capital in the economy.

5 To the extent that migration neither increases the supply of particularly valued skills nor improve labour market

matching, then it is more likely to add to workforce participation rather than enhance productivity growth.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

There then exist two sets of conflicting incentives. On the one hand, the [economic surplus related
to immigration] is larger if the host country admits immigrants who most complement the skilled
native workers, or unskilled immigrants. On the other hand, the economic surplus related tomigration is larger if the host country admits immigrants who most complement the native-owned
capital, or skilled immigrants. (Borjas 1999, p. 1707)
The effects of migration may also change over time, as the mix of skills and technologies change across the
economy.
The empirical evidence highlights the differing effects of migration on higher and lower-skilled incumbent
workers. For instance, in the United States, Peri (2012, p. 348) showed that the productivity gains from
immigration were largely driven by task-specialisation of ‘native’ workers induced by migrants, in that:… productivity gains may be associated with the efficient allocation of skills to tasks, as
immigrants are allocated to manual-intensive jobs, pushing natives to perform
communication-intensive tasks more efficiently.
At the same time, migration often targets labour shortages, thereby putting downward pressure on wage
growth. Wages are an important mechanism in a well-functioning labour market — the adjustment of relative
wages encourage workers to shift to jobs and industries where their skills are most valued. For thesereasons, migration settings often hinge on attracting migrants where there are domestic skill shortages andincipient wage pressures that could limit economic growth. During the mining boom, for instance, migration
was crucial in securing the skills needed to take advantage of commercial opportunities, while likely
providing at least some downward pressure on the exponential growth in mining-related wages.
Migration can produce significant benefits in the absence of shortages, depending on the degree of skill andtypes of occupations involved.
• In skilled occupations, migration increases competition among professionals, which can provide incentives
for workers to improve their skills or pursue further specialisation.
• Increasing the diversity of skills can lead to further differentiation of products and services. For example,
while hairdressing could be considered a single occupation, hairdressers6 provide a diverse range ofservices requiring some specialisation. The barriers to entrepreneurship are relatively low, meaning thatnew practitioners are able to bring new service offerings to market. Accordingly, migrant hairdressers
would be less likely to depress wages than would be the case with a more homogenous group in directcompetition for a finite number of job vacancies.
• In some cases, migration can enable the diffusion of innovation, particularly where foreign work
experience helps Australian firms adopt global best practices, or where foreign specialists may benecessary to implement technology or innovative approaches that are new to Australia.
One of the biggest concerns surrounding migration is the effects of low-skill migrants on low-skill incumbent
workers. Those concerns partly reflect an assumption that incumbents’ behaviour does not change to improvetheir prospects (such as engaging in training) and ignores the impact that additional labour has on additional
demand. Moreover, workplace institutions mitigate outcomes for low-wage incumbents as they set floors inwages and conditions (Foged, Hasager and Yasenov 2022). The variations in such institutions between
countries explains some of international variations in findings about the labour market effects of migration.

6 Similar arguments apply equally to other occupations such as cooks and chefs.

16

Improving productivity through migration

Australia’s experience of job matching and migration
Empirical evidence suggests that, while migration may sometimes depress wages in some sub-markets (or limit
wage growth), the size and frequency of any such effects should not be overstated. The overseas empiricalevidence suggests that migration has a relatively small (negative or positive) effect on wages and employment ofincumbent workers (PC 2016a, pp. 194–199). The evidence for Australia is generally neutral or positive:• Broadly, Australian evidence suggests that immigration has not depressed wage growth for low-skilledworkers (Brell and Dustmann 2019).
• Crown, Faggian and Corcoran (2020) examined HILDA data from 2005–2015 for different Greater Capital
City Statistical Areas (GCCSA). They regress pay and other outcomes in each GCCSA against worker
characteristics, state and industry-specific characteristics, and the number of temporary work visa holders
as a proportion of the population. They found no evidence of negative effects of the temporary work visa
holders on the wages of high-skilled or low-skilled native workers. Nor did they find negative effects on thewages of previous migrants, who may be closer substitutes to new skilled migrants.
• Breunig, Deutscher and To (2017) examined changes to migration supply in different skill groups (definedby education and experience). After controlling for experience and education, they found ‘almost no
evidence that immigration harms the labour market outcomes’ of workers born in Australia. (The authors
had been commissioned to undertake this analysis for inclusion in the Productivity Commission’s inquiry
on the Migrant Intake into Australia (PC 2016a).)• CEDA (2019) examined labour market outcomes of local workers, including the unemployment rate,
weekly wages, and annual earnings. They analysed the effect of successive waves of migrants arriving inAustralia since 1996. They found that waves of migration did not adversely impact labour market
outcomes of local workers. A positive relationship was found between migration and wages.
• At the same time, evidence has shown that the risk of underpayment for many migrant workers is material
in some industries (Cash 2015; Schneiders and Millar 2015; SEERC 2016). This risk extends beyond thedesign of skilled migration as it affects holders of other visas, including those with restricted andunrestricted working rights.
However, there is also evidence that systemic mismatches can occur between migrant skills and jobs in thelabour market.
• CEDA (2021a) point to survey evidence suggesting that 55% of skilled migrants work in their nominatedfield while 15% work at the same or higher skill level than their nominated occupation. The remaining 30%
work in jobs that involve lower skills than those in their nominated occupation or are unemployed — asignificant sign of mismatch. For migrants arriving between 2013 and 2018, the degree of skills mismatchin their first 18 months of arrival resulted in forgone wages of $1.25 billion.7• Deloitte Access Economics (2018) found that in Queensland, about half of skilled migrants are not using
the skills and experience gained before arriving, often due to lack of recognition of their qualification (25%)
or of their work experience (14%). They estimate the cost of forgone wages and economic activity at$250 million in the decade to 2019.
• Tan and Cebulla (2022) undertook econometric analysis of South Australian data to show that migrants
faced a greater risk of unemployment than others (despite comparatively higher levels of qualifications) with
about 52% of those employed identifying as overqualified for their job. They found that labour market
outcomes for skilled migrants are affected by employers’ relative ‘devaluation’ of some foreign qualifications.

7 CEDA use survey data on the numbers of people experiencing skills mismatch, their skill level and median wages byskill level. Assuming a 12-month duration for skills mismatch, they estimate that skills mismatch is the equivalent of $1.25
billion in forgone wages in 2018 for migrants arriving between 2013 and 2018.
17

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report• Engineers Australia surveyed 817 migrants with engineering qualifications and found that 57% of skilled visa
holders were working as engineers, while a further 26% were actively seeking work as an engineer (Engineers
Australia 2021, p. 19). They identify several issues including employers’ preferences for local experience.
The existence of such labour mismatch suggests that policy settings should re-assess the composition of the
migrant intake in terms of the type and level of skills, as well as their complementarity to the incumbent
labour market (sections 2.3–2.10).
In addition, the economic effect of skilled migration is shaped by the barriers that migrants face once they
arrive in Australia. Tan and Cebulla (2022) found that labour market outcomes for skilled migrants areaffected by employers’ relative ‘devaluation’ of some foreign qualifications. Engineers Australia note that new
migrants face difficulty in meeting employers’ preferences for local experience (Engineers Australia 2021,
p. 19). To the extent that any such difficulties are avoidable, or indeed reflect unintended consequences ofregulation, there could be potential for productivity-enhancing reform (discussed in section 2.4).

Lifetime fiscal impacts
The fiscal outcomes of migration can also improve productivity to the extent that they lower average taxes
and the distortions these have on investment, innovation, labour supply and the returns from training. The
fiscal impacts of migration and skills matching are separate but related concepts. All things equal, both canbe improved when migrants achieve better outcomes in the labour market (for instance, skills mismatches
result in forgone wages, which in turn have negative fiscal implications). There are also circumstances where
the direction of their effects does not coincide (discussed below).
Overall, Australia’s skilled migration program accounts for the vast majority of permanent migration and has
substantially higher net fiscal impacts than incumbent Australians as estimated over the lifetime (table 2.1).
Table 2.1 – Lifetime fiscal impacts vary between permanent visa subclasses
Number of visa places for 2022-23 and estimated lifetime net fiscal impacts
2022-23 planned number

Estimated lifetime net fiscal impactof migrants (No.)(NPV$ per person)

Skilled migration

142 400

198 000

Total migration program

195 000

41 000—-85 000

Visa category

Australian population
Sources: Department of Home Affairs (2022); Varela et al. (2021).

Most of the risk of negative fiscal impact occurs during childhood and after retirement (figure 2.1), so that the
fiscal risk associated with migration relates mainly to permanent migration at older age groups. Migrants tend
to have a net positive fiscal impact if they arrive as young adults because for much of their lifespan theywork, contribute to taxes and use few (health and other) services (figure 2.2). Moreover, temporary migrants
of working age are also likely to have net positive fiscal impacts as they are not associated with age groups
with the greatest net fiscal liability and are not eligible for many free taxpayer-funded services.

18

Improving productivity through migration

Figure 2.1 – Typical interactions with the tax and transfer system

20 000

20 000

15 000

15 000

10 000

10 000

5 000

5 000

0

0
0

10

20

30

40

50

60

70

80

90

100

110

120

-5 000-5 000-10 000-10 000-15 000-15 000-20 000-20 000

Age
Other State revenue
GST
HealthNet impact

Per person NPV ($)

Per Person NPV ($)

Estimated lifetime profile of fiscal revenues and expenses for an Australian born in 2018-19

Indirect taxes
Transfers
Education

Income tax
Other expenditure
Aged care

Source: Varela et al. (2021).

Figure 2.2 – Key lifetime fiscal impacts by age on arrival
Net present value estimates of fiscal impacts per average permanent immigrant, net
overseas migrant intake, 2013-14 dollars
200
150

Net present value $ (‘000)

100
50

Age on arrival

0
0

4

8

12

16

20

24

28

32

36

40

44

48

52

56

60

-50
-100
-150
-200

Skill (primary applicant)Skill (secondary applicant)-250

FamilyGeneral population)-300

Source: PC (2016b).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

To improve fiscal impacts, permanent migration settings should aim to attract younger migrants. Thisrequires the acknowledgement of migrants’ fiscal contributions from the first year of their arrival (figure 2.1).
This differs from the estimates of lifetime fiscal impacts for different visa subclasses produced by Varela etal. (2021) and PC (2016b) as there are many different pathways that conclude with the same permanentskilled visa. For instance, all things being equal, a migrant who had spent their early and mid-career inAustralia on temporary visas only to subsequently take up permanent residency would have the same fiscal
impact as if they had taken permanent residency immediately.
People who apply for skilled migration visas often have secondary and other applicants, typically spouses
and dependent children, who have their own fiscal impacts. This suggests that improving the fiscal impactsof migration should take into account the entire migration ‘unit’, rather than the skilled worker alone. Such
impacts should be considered alongside the non-economic objectives associated with visas for spouses anddependents given that it would be undesirable for migration settings to separate family members. At thesame time, migration settings must balance the social benefits of such visas with the fiscal implications.
There can be trade-offs between the objectives of skill matching and fiscal outcomes. For example, a personwith highly valued skills and high income migrating at an older age can still contribute significantly to
productivity through their skills, networks and transfer of knowledge even if it is not for a long period, butnonetheless their subsequent retirement and use of services may produce net negative fiscal outcomes.
The treatment of secondary applicants in eligibility criteria also exemplifies the potential trade-off between fiscal
impacts and job matching. For instance, a primary applicant with ideal labour market attributes might be:• awarded a visa alongside secondary applicants who have negative net fiscal outcomes (thereby reducing
the fiscal impact of the migration unit)• or not awarded a visa due to the expected fiscal liability of their secondary applicants (thereby losing askilled migrant who is highly valued in the labour market and would have otherwise been a prime
candidate for the visa).

Key elements of design for the migration system
In pursuing policy settings that better promote productivity, it will also be important for policymakers toadhere to principles of good policy and system design. Some of the key design challenges for Australia’s
migration program are:••••to reduce complexity of the system overall
ensuring integrity, including by protecting migrants from exploitation
how to ration (permanent) visa places when oversubscribed
addressing both short and long-term policy objectives.

While there are inherent trade-offs between different elements of system design, there are also opportunities
for improvement.

Reducing complexity
Reducing the complexity of any administrative system is a worthy goal, given the implications for complianceand administrative costs. Australia’s migration program has been described by many as being particularlycomplex (Mcllroy and Read 2022; Universities Australia 2022), in part due to the number of visa subclasses,88 At the time of writing there were 22 skilled migration visa subclasses and 23 family and partner visa subclasses, among

others for tourism, study, and humanitarian purposes.
20Improving productivity through migrationand in part to the complex application processes and selection criteria. Many applicants for permanent
migration engage migration agents to help navigate the system.9
To some extent, complexity arises because governments attempt to meet multiple policy objectives whenshaping the composition of the migrant intake. Indeed, having very few visa subclasses to meet very many
objectives would likely confuse policy decisions further.
There would be value in governments being explicit and transparent about what policy objectives andconstraints drive migration policy. In particular, they should be clear about fiscal implications and theimplications for productivity. This would not necessarily mean that economic constraints would override otherobjectives — rather, that social and other objectives should be met as efficiently way as practicable.
Designing efficient ways to achieve policy objectives will itself lead to some simplification of the visa system.
And given that the economy-wide productivity and fiscal implications of migration far outweigh thecompliance costs involved, the former should be given priority in driving reform.

Ensuring integrity
The integrity of the migration program is a perennial concern. For instance, given the risk that the Student
visa could be used as a means of accessing paid work and not for study, restrictions are placed on working
hours for Student visa holders.
Still, risks remain. Several incidents of underpayment have been uncovered for a range of visa holders,
including those with restricted and unrestricted working rights (Cash 2015; Schneiders and Millar 2015;
SEERC 2016). The enforcement of prevailing labour laws warrants continuous improvement. Moreover, any
major reform to migration policy (including changes to institutional arrangements, incentives, or
administrative processes) should involve an assessment of potential risks to integrity.

Managing oversubscription
Controls on the numbers of permanent migrants typically take the form of caps and eligibility criteria, with thecap the typical binding constraint in any given year if there is oversubscription. High levels ofoversubscription is problematic as it increases the level of uncertainty faced by would-be immigrants, withpotentially long-run impact on the attractiveness of a destination country. The backlogs that oversubscription
raises introduce complications for governments. Permanent visas in Australia involve waiting periods ofmonths (and sometimes years. Rolling backlogs make it more difficult to manage the migration intake oversuccessive periods. A number of reforms could go some of the way to resolving these issues, including
those discussed in section 2.10.
In contrast, temporary visas do not have caps, and inward flows are solely determined by eligibility criteria
and the efficiency of visa processing.

Meeting immediate and future challenges
Migration policy needs to differentiate between and balance its short- and long-term objectives (box 2.2). If
reforms were aimed only to meet the most immediate concerns, then in the current climate, it would likely
target the labour shortages resulting from COVID-19-related disruptions. If aimed at longer-term challenges,

9 In 2018, there were 7402 migration agents registered with the Office of the Migration Agent Registration Authority (Joint

Standing Committee on Migration 2019).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

it would seek to address longer-term trends such as population ageing, and provide emerging skills andcapabilities sought by more innovative firms.
Ideally, migration policy settings should provide some form of stability for prospective applicants, theirfamilies, employers, and communities. Pursuing long-term objectives requires some form of consistency ofpolicy based on agreed principles but not the specific designs of all visa categories and the weight given tothem. Some parameters will need to reflect contemporary conditions, while at the same time, addressing
emerging trends and making provisions for longer-term needs.
Moreover, the overall migration program (and its system of visa subclasses) warrants regular review and revision.

Box 2.2 – Challenges for migration policy in the short and long term
In the immediate term, global migration patterns still reflect the aftermath of the COVID-19 pandemic,
which disrupted both global and intra-Australian migration patterns, with international and state andterritory borders closed for prolonged periods of time (chapter 1). In part, the effects of lower flows of
migrants into Australia, especially by international students, was offset by the rise in bridging visas for
temporary migrants already in Australia. Nevertheless, the net effect of changing migration patterns led
to labour shortages in parts of the economy (such as hospitality and fruit picking) that typically rely
heavily on migrant workers.
A broad question pertaining to permanent migration policy is to what extent Australia remains an
attractive destination for skilled migrants — and how well can Australian businesses compete for talent in
the global labour market.
The recent evidence is mixed on Australia’s attractiveness compared with other advanced economies.
Global interest in migration to Australia has shown signs of a strong recovery post border closures, and theAustralian Government has recently announced plans to boost the migration cap. However, several othercountries have taken proactive steps throughout the pandemic to attract migrants by increasing theirpermanent migrant intake and reforming visa policies (CEDA 2021a). If Australia has become lessattractive to migrants than prior to COVID-19, future migration decisions may be more sensitive to thecompliance costs associated with the migration system. Such costs affect all migrants, including those withskills that are highly sought after, who are likely to have labour market options elsewhere in the world.
In the longer term, migration settings will need to address evolving and partly unpredictable labour
market needs. In particular, the demand for services will continue to rise, as will their variety. Population
ageing will place increasing pressure on the demand for disability, aged care and health services while atthe same time, dependency rates may deplete the workforce able to deliver such services(CEDA 2021b). Governments can partly address these looming pressures through policy planning (asled by agencies as Jobs and Skills Australia) and by setting an efficient workplace relations framework(such that wage mechanisms allocate labour resources to where they are needed). However, migration
is likely to have an ongoing role in filling skill gaps, given that:• various advanced technical skills are likely to meet excess demand due in part to the importance of
emerging highly-specialised skills that might not yet be reflected in formal training (Boyton 2022)• certain skills may become scarce where wage mechanisms are unable to shift workers’ preferences(and constraints) about the kinds of careers they wish to pursue and where they wish to live.

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Improving productivity through migration

Box 2.2 – Challenges for migration policy in the short and long term
The former will be particularly important for encouraging innovation and diffusion. For example, someemerging occupations, such as technology product managers,a are difficult to find in Australia (discussed
in volume 4).
The migration system will also need to better meet the needs of technology businesses that have a
global outlook and need a global pool of footloose highly-trained employees who work closely with local
staff. While this may replace some need for permanent migration, it will increase the value of fast
processing of intermittent temporary migration for teams to collaborate.
a. These managers combine business, technical and user experience skills to oversee a product’s development in a
way that meets customers’ needs.

Finding 7.1
Reform objectives for productivity-enhancing migration settings
Skilled migrants stimulate productivity and make net fiscal contributions over their lifetimes whereas undercurrent fiscal settings, incumbent Australians make negative net contributions. Both productivity and public
wellbeing objectives would be enhanced by migrants with skills that complement domestic labour andcapital. Consequently, reforms should be designed to improve the composition of the migrant intake — totarget migrants with valued skills of prime working age — and to address undue barriers in the labour
market for newly arrived migrants.
Several key elements of system design are vital considerations in producing productivity-enhancing reforms.
• The complexity of the migration program increases compliance and administrative costs, but somecosts are unavoidable due to the number of policy objectives associated with migration. Designingefficient ways to achieve policy objectives will itself lead to some simplification of the visa system.
• Backlogs for permanent migration are the result of different approaches to eligibility, and should befactored into reform decisions about the design of permanent migration visas. Waiting times for
temporary visa approvals should be as short as practicable.
• Reforms to migration policy should be set with both short and long-term objectives in mind, and theoverall migration program warrants regular review and revision.

2.2

Strengths and weaknesses of the current system

The policy objectives and trade-offs discussed in section 2.1 provide a basis for assessing the performance of
current migration policy settings and to identify opportunities for improvement. From a productivity perspective,
key considerations include the expected net fiscal impacts of different visa subclasses and their contribution tolabour market matching. It is also important to consider whether particular visas achieve other intended objectives.
This section considers temporary and permanent migration visas, as well as the use of skilled occupation
lists. The analysis is not intended as an audit of the performance of the Department of Home Affairs in
administering the migration system. Some migration visas are not examined at all — such as thehumanitarian stream — because they have different objectives.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Temporary skilled migration
The net fiscal impacts estimated for temporary migration visas are typically positive (table 2.2).
Employer-sponsored migrants under the Temporary Skill Shortage (TSS) visa subclass have the highest net
fiscal impact on average. While student visas have the smallest (though still positive) fiscal impacts, theprimary objective of these visas is to facilitate study rather than paid work (indeed, paid work is deliberately
limited as a condition of the visa).
Table 2.2 – Fiscal impacts also vary between temporary visa subclasses
Estimated lifetime net fiscal
Visa category
Graduate (subclass 485)

impact per person ($NPV)
7 806

Other details
Visa entails full-time working rights. Typical visa
duration is between two to four years, depending on
the qualification.

Student (subclass 500)

217

Visa entails limited working rights. Estimate does notinclude tuition fees paid to Australian education
providers equal to $32 000 on average.

TSS (subclass 482)

38 601Visa entails full-time working rights and is dependent
on employment (employer sponsorship). Typical visa
duration is up to 4 years.

Working Holiday Maker

2 317(subclass 417 and 462)

Visa entails full-time working rights. Typical visa
duration is one year.

Sources: Department of Home Affairs (2022); Varela et al. (2021).

Temporary skilled migration is under-used
The use of temporary skilled migration declined over the decade leading up to the COVID-19 pandemic(figure 2.3), partly reflecting changes to the visa implemented by successive governments during the period.
While numbers have shown signs of rebounding from the lows of 2020-21, they remain below pre-pandemic
levels — despite historically low unemployment. Indeed, as CEDA (2022b) noted, temporary skilled migration
was used to a much greater extent during the mining boom.
By contrast, working holiday visas consistently outnumbered skilled temporary visas over the past decade(figure 2.3). Overall, working holiday and student visa holders outnumber temporary skilled visa holders
across all industries (figure 2.4). This suggests that much of Australia’s temporary migration program iscurrently geared toward the supply of lower skilled labour.
In human services migrant workers typically hold working holiday, student and family visas. In Aged Care,
30% of workers are migrants, but less than 1% are sponsored for employment in this industry (Coates,
Sherrell and Mackey 2022, p. 27). In caring professions more broadly, 38% arrived on a student visa
(Eastman, Charlesworth and Hill nd). Relying upon ‘sideways entrants’ may not lead to optimal labour market
matching, and prioritising skilled temporary visas for care work would likely produce better outcomes in termsof qualifications, experience and career motivation (CEDA 2022b).

24

Improving productivity through migration

Improving the administrative efficiency of the approval process would encourage greater uptake of temporary
skilled migration. Waiting times are costly for employers seeking to temporarily fill skilled positions and limit
the attractiveness of Australia as a destination for migrants.10 In January 2023, 50% of short-term TSS visas
took 20 days or more to process, 10% took up to 3 months. Governments should weigh up the business andeconomic costs of delay against the administrative cost of increased resourcing, and give priority for
temporary migrants that are critical to immediate business needs. Timely processing can also improve thevalue proposition of sponsored skilled temporary migration for employers. (It should be noted that the
Department of Home Affairs has invested in additional staffing to decrease waiting times, and posts medianwaiting times to inform sponsoring businesses and migrants.)
Figure 2.3 – Temporary skilled migration is used less than during the mining booma
70 000Skilled (temporary)

Working holiday

60 000

Persons (no.)

50 00040 00030 000
20 000
10 0000a. Estimates for 2021-22 are preliminary.
Source: ABS (Overseas Migration, 2021-22 financial year, Cat. no. 3407.0).

10 For TSS visas, about 90% of applications are resolved within 7 months for the short-term stream, and within 4 months

for the medium-term stream (Home Affairs 2021c).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Figure 2.4 – Skilled temporary visa holders are outnumbered by other temporary visa
holders in each industry
Proportion of temporary visa holders in each industry by type of visa, 2016
Other temp. migration

Skilled temporary migration

Wholesale trade
Transport, postal, and warehousing
Retail trade
Rental, hiring, and real estate services
Public administration and safety
Professional, scientific, and technical services
Other services
MiningManufacturing
Information media and telecommunications
Inadequately described
Health care and social assistance
Financial and insurance services
Electricity, gas, water, and waste services
Education and training
Construction
Arts and recreation services

Agriculture, forestry, and fishing
Administrative and support services
Accommodation and food services

0%

10%

20%

30%

40%

50%

60%

70%

80%

90% 100%

Source: Adapted from Coates et al. (2022).

The re-design of the employer-sponsored temporary skilled migration, including how it is targeted, would
have more fundamental effects. For instance, employer-sponsored temporary skilled migration is targeted, inpart, by a salary threshold — The Temporary Skilled Migrant Income Threshold (TSMIT)11 — that aims toprevent the use of sponsorship for low-wage occupations. However, while originally intended to reflect themedian Australian income, the threshold has been held constant at $53 900 since 1 July 2013 and would
have risen to $63 000 if indexed by the wage price index (Coates, Sherrell and Mackey 2022; Willox 2022).
Many sponsored workers are not affected by the TSMIT, even if it were indexed to the wage price index. On
average, for visas granted in the September quarter of 2022, the nominated wage for temporary migrants
across all industries is well in excess of this threshold ($104 500), with the average for individual industries
being in excess of $80 000 except for in Accommodation and Food Services ($67 100) and Agriculture,
Fishing and Forestry ($69 300) (Home Affairs 2022b, p. 6) (figure 2.5). However, at wage levels closer to the
TSMIT (i.e. below median wages) employer-sponsored migration will include people with lower-level skills
and experience — raising questions about the degree of complementarity to the existing workforce.

11 In addition, employers must ensure that overseas workers are paid no less than an equivalent Australian worker.

26

Improving productivity through migration

Employer-sponsored temporary migration is also restricted to occupations in the relevant occupational skill
shortage list. These lists significantly and adversely restrict the scope of (temporary and permanent)
migration, which provides a strong motivation for their reconsideration (section 2.4)
Figure 2.5 – Average nominated salaries for temporary skilled migrants are relatively
high in most industries, June to September 2022a
Average nominated salary for primary applicant ($)
Wholesale trade
Transport, postal and warehousing
Retail trade
Rental, hiring and real estate services
Public administration and safety
Professional, scientific and technial
Other services
MiningManufacturing
Information media and telecommunications
Health care and social assistance
Financial and insurance services
Electricity, gas, water and waste services
Education and training
Construction
Arts and recreation services
Agriculture, forestry and fishing
Administrative and support services
Accommodation and food services

127 100
110 500
83 70087 600107 800
113 600
97 900163 900
92 100117 400
103 700
158 800
154 200
89 20099 80096 50069 30098 00067 100040 00080 000120 000
Nominated salary ($)

160 000

Number of applications granted
Wholesale trade
Transport, postal and warehousing
Retail trade
Rental, hiring and real estate services
Public administration and safety
Professional, scientific and technial
Other services
MiningManufacturing
Information media and telecommunications
Health care and social assistance
Financial and insurance services
Electricity, gas, water and waste services
Education and training
Construction
Arts and recreation services
Agriculture, forestry and fishing
Administrative and support services
Accommodation and food services

130
170
410
80
20

2 870
2 730
390
800
1 400
1 900
480
170
290

1 020
60
330
40
1 220

0

500

1 000
1 500
2 000
2 500
Applications granted (no.)

3 000

3 500

a For applications granted in 2022-23 as at 30 September 2022.
Source: Department of Home Affairs (2022b).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Permanent skilled migration
While it is difficult to directly estimate the extent of matching of jobs and skills among migrants, evidence
from the Continuous Survey of Australian Migrants (CSAM) shows that after 18 months of settlement, 73% ofskilled migrants were employed in either their nominated occupation (57%) or in a different occupation withan equivalent or higher level of skill (16%) (Department of Home Affairs 2020, p. 7). Among the 23% of all
skilled migrants working at a lower level than their nominated field, this was more common in thestate-sponsored scheme (31.5%) than for the onshore independent stream (26%), offshore independent(20%), or employer-sponsored (13%) (CEDA 2021a, p. 37).
Fiscal impacts are much more significant for permanent migration visas than for temporary — the longer
durations entail greater opportunities to capture tax revenue over a migrant’s working life, as well as greaterrisks of government expenditures later in life. The lifetime net fiscal impact of migration varies significantly
between visa subclasses (table 2.3). Employer sponsored migrants have the highest net fiscal impact, while
the Business Innovation & Investment visas are associated with the lowest (negative) fiscal impacts of theskilled migration streams.
From a fiscal perspective, the performance of the permanent migration program could be improved byadjusting the balance of visa subclasses in the migrant intake to favour the better-performing visa
subclasses.12 However, it is also important to consider how different visas contribute to labour market
matching and whether they achieve other policy objectives. To the extent that it is clear why some visas
perform better than others, this will help inform how reform could improve particular visa subclasses and/or
whether the balance of the migrant intake should be changed.
Table 2.3 – Lifetime fiscal impacts vary between permanent visa subclasses
Number of visa places for 2022-23 and estimated lifetime net fiscal impacts of primary
applicants for 2018-19
Estimated lifetime net fiscal
2022-23 Planned number of migrants
Visa category

impact for 2018-19 cohort

2021–222022–23(primary applicants)

No.

No.

(Net Present Value, $)Employer Nominated

22 00035 000557 000

Skilled Independent

6 500

32 100386 000

Regional

11 20034 000279 000

State / Territory Sponsored

11 20031 000186 000

Business Innovation & Investment

13 500

5 000-117 000

Global Talent (Independent)

15 000

5 000

—

200

300

—

79 600142 400

198 000——-85 000

Distinguished Talent
Total skilled
Australian population

Sources: Department of Home Affairs (2022); Varela et al. (2021).

12 This would require sufficient additional demand from applicants (and in some cases, sponsors) for different visa

subclasses, and would also be subject to assumptions about the quality of additional applicants in each stream.
28

Improving productivity through migration

Business and investment visas
Business Innovation and Investment program (BIIP) visas are intended to attract foreign investment. However,these visas do not appear to have achieved this outcome or to have promoted innovation or genuine
entrepreneurship (as discussed in chapter 2 of volume 3 and in PC (2016b)). In 2015, the Joint Standing
Committee on Migration found that while the BIIP delivers some economic benefits, it failed on many grounds:… based on the evidence, it is difficult to conclude that the programme meets any of the following
key objectives:
•
•
•
•
•

increase the export of Australian goods and services
increase the production of goods and services in Australia
introduce new or improved technology
develop links with international markets
increase the dispersal of business migrants across Australia through State and Territory
government nomination. (Joint Standing Committee on Migration 2015, p. 30)

Moreover the mix of migrants using BIIP visas are inimical to productivity and fiscal outcomes. Comparedwith skilled worker visa holders, they have lower incomes, lower skills, poorer English language proficiency
and are older. On average, the average business investment visa holder imposes a net fiscal cost of$117 000 (Varela et al. 2021), which is well below that of other skilled migrants and of non-migrantAustralians. Indeed, the estimated fiscal cost of the visa program could be greater, given that BIIP visa
holders are more likely to be accompanied by secondary applicants.13
In 2021, the Australian Government (2021) announced a host of changes to the BIIP, which could improve
its performance, but only at the margin.
• Age limits of 55 years were implemented, although they can be waived by the nominating party — therelevant State or Territory Government, or Austrade. The potential for State and Territory Governments towaive the age threshold disregards the fact that the majority of the fiscal risk at older ages is borne at thefederal level (due to aged care and health services).
• English language requirements were implemented, albeit with the alternative option of paying a 2nd visa
application charge, which may well be an entirely inadequate payment given future fiscal risks.
• Several investment thresholds were raised, including those relating to complying Investments, minimum
net assets. However, these assets are owned by the visa holder and do not necessarily confer any benefit
on Australians. As a highly open economy, Australia has far better ways of accessing foreign direct
investment and in the volumes that make a difference.
• The minimum duration of investment was increased in some cases, including for provisional (temporary)visas, where investments now must be held for the duration of that visa. However, in several other cases,
including for permanent migration visas, minimum durations were not changed.
It is unlikely that the recent (modest) changes to the BIIP will significantly improve outcomes. Overall, this setof visas performs poorly on almost all fronts.

13 Migrants under BIIP visas between 2012 and 2016 were on average accompanied by 2.4 secondary applicants,

compared with an average of less than one for migrants under skilled-worker visa streams (Coates, Sherrell andMackey 2021, p. 44).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Sponsored and independent permanent visas
The bulk of the skilled permanent visa program is split between:• the Employer Nominated visa (subclass 186), which requires an employer to formally nominate/sponsor
an individual employee for permanent migration• the Skilled Independent visa (subclass 189), which is based on a points system that rewards migrants’skills and attributes• the Permanent Residence (Skilled Regional) visa (subclass 191), which also works on the basis of apoints system but require a minimum duration of time spent in a nominated regional area
• the Skilled Nominated visa (subclass 190) which are allocated to State and Territory decision-making
authorities allowing the application of additional criteria.
Employer-sponsored migrants have the highest net positive fiscal impact, followed by the skilled independent
visa holders, though the latter have (slightly) higher wages when employed (figure 2.6).
Figure 2.6 – Skilled Independent visas have higher incomes and unemployment, 2013–2018
Median annual full-time earnings
100

25

Employer Nominated
Skilled Indpendent (offshore)

90

Employer Nominated
Skilled Indpendent (offshore)

20

80

Unemployment (%)

Median full-time income ($)

Unemployment rate

70
60
50
40
30
20

15

10

5

10
0

0
2013

2014

2015

2016

2017

2018

2013

2014

2015

2016

2017

2018

Source: Department of Home Affairs (2020) Continuous Survey of Australian Migrants (CSAM).

The fiscal results are counterintuitive given that the incentives faced by sponsoring employers only partlyalign with the public benefit, while the skill mix and incentives faced by skilled independent visa holders
appear more likely to raise wages:• While employers might expect to retain their sponsored worker for a significant period of time (say up to 5
or 10 years), they have no direct incentive to ensure the applicant has a successful career subsequently,
nor any incentives related to the fiscal implications of the retirement phase. Accordingly, there is somepotential for a disconnect between employer needs and net fiscal outcomes over the lifetime. There is astrong case that age restrictions should apply to any sponsored permanent migration visa, and potentiallyother attributes that are important for ongoing career success (such as English language skills).
• Similarly, employers have little to no incentive to consider the fiscal impacts of secondary applicants or the
migration unit as a whole (although such impacts are not captured in the estimates in table 2.4).

30

Improving productivity through migration• Employer sponsorship can also adversely affect labour mobility, at least temporarily, given migrant
workers are unable to further test the labour market. This partly reflects the relatively high transaction
costs borne by the sponsoring employers, which also leads to greater risk aversion about sponsorship(discussed later). These issues could partly be resolved by reducing the cost to employers of sponsorship,and by allowing workers to switch to similar or better job offers after a period of time with their sponsoring
employer without applying for a new visa.
• Moreover, compared with employer-nominated visas, skilled independent visas entail no geographic
restriction on the migrant (as is the case for regional and state and territory programs) and requires nonegotiation or sense of implied obligation to an employer. A priori, it would appear to be the most desirable
form of skilled visa from the migrant’s perspective. Therefore, it would be reasonable to expect the mostcapable and valued workers to opt into the skilled independent visa.
• In addition, employer-sponsored migration has been used for a range of occupations, not necessarily
higher-skilled or higher-income occupations, particularly prior to the pandemic (figure 2.7). Cooks were themost common occupation among Employer Nominated visas awarded between 2012-13 up to 2019-20,
while a significant number worked as motor mechanics and restaurant and café managers — occupations
where the prospects for complementarity with incumbent workers are relatively low. (Non-complementarity
is usually associated with lower wages.)
The most likely reasons for better outcomes are that employer nomination identifies positive hard-to-observe
traits of a migrant that are not readily measurable through the points-based skilled independent visa stream,
and that its lower tangible and intangible costs encourage its uptake by talented migrants. Employers are
uniquely situated to observe the skills and attributes required for the job, including soft skills that may not bedemonstrated by formal credentials. This is difficult to replicate by other means and, consequently,
points-based systems face an inherent challenge of targeting skills and attributes valued for a particularoccupation — other than rewarding paid work experience itself, which is done imperfectly (discussed below).
Employer-sponsored visas are also attractive to those migrants wanting greater certainty about their career
and wages given that skill mismatch is higher for independent visas. While independent visa holders tend to
get higher wages when employed, they also have higher unemployment rates (figure 2.6). CEDA (2021a)
noted that the Australian permanent visa subclasses that relied on the broadest occupation lists and lacked
employer involvement had the highest rates of skills mismatch (p. 10).
The pathway to permanent residency is also important given that about three quarters of Employer
Nominated visas were awarded to applicants who had previously held a TSS visa (Coates, Sherrell andMackey 2021). To the extent that the positive fiscal outcomes are a product of greater certainty about theapplicant’s ability to contribute in the workplace, this is likely to be greatly assisted by time spent on
temporary skilled migration. In other words, a pathway to permanent residency that includes a period of
temporary skilled migration may itself be valuable in identifying migrants with positive employment prospects(and this need not be unique to employer-sponsored permanent migration).
The (misplaced) intuition that the points-based skilled independent visa stream would necessarily besuperior to the employer nominated stream is important in providing lessons for migration policy. Policy
settings should, as much as possible, depend on evidence about outcomes and the underlying processes
that lead to good employment and fiscal outcomes.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Figure 2.7 – Top 10 nominated occupations for permanent skilled visas before and after
the pandemic
Primary applicants, 2018-19 to 2020-21
Skilled Independent visa
Civil Engineering Professionals

Accountants
ICT Business and Systems Analysts2
Other Medical Practitioners
Other Engineering Professionals
Chemical and Materials Engineers

Industrial, Mechanical and Production Engineers
General Practitioners and Resident Medical Officers
Registered Nurses
Software and Applications Programmers
0

5

10

15

20

25

Per cent
2021–222020–212019–20

2018–19

Employer Nominated visa
Civil Engineering Professionals

University Lecturers and Tutors
Cooks
Motor Mechanics
Auditors, Company Secretaries and Corporate…
ICT Business and Systems Analysts2

Registered Nurses
Accountants
Chefs
Software and Applications Programmers
0

2021–222

2020–214

2019–2068Per cent

10

12

14

2018–19

Source: Department of Home Affairs, Australian Migration Statistics, 2020-21.

Overall, the evidence suggests that employer-sponsorship provides more certainty of labour market
outcomes, but points systems can target valuable characteristics and higher-level skills. There would
be value in better targeting sponsorship towards higher-level skills and occupations, and accounting for the32

Improving productivity through migration

fiscal risks related to age. The points-based system is more prone to labour market mismatch for some
applicants, suggesting the selection mechanism could be better linked with the needs and preferences of
employers in the labour market.
A key factor in the targeting of permanent skilled migration is its reliance on skilled occupation lists, which
restrict skilled migration to occupations that are identified as being in shortage. Income thresholds may also
be relevant in how Employer Nominated visas are used — similar to requirements for the TSS, employers
must pay above the TSMIT threshold and ensure that overseas workers are paid no less than an equivalent
Australian worker would.

Skilled occupation lists
Skilled occupation lists are used as a tool for rationing and allocation of sponsored temporary, sponsoredpermanent, and independent permanent migration, for both sponsored and independent visas (box 2.3).
They are a key mechanism determining the types of imported skills. The performance of lists is relevant toproductivity in that:• they may result in undue restrictions on the use of migration to fulfill labour market needs• preferential access to skilled migration for particular industries has implications for the efficient allocationof resources• changes to the size and composition of migration have implications for labour market outcomes more broadly.
There are a range of conceptual and practical issues concerning the implementation of skills shortage lists.

Box 2.3 – Occupational lists for skilled migration in Australia
Eligibility for temporary and permanent skilled migration is determined by different lists, depending on thevisa subclass. They include:• The Short-term Skilled Occupation List (STSOL): lists occupations selected to fill ‘critical, short-termskills gaps’. This list has 216 occupations. A person who is qualified in an occupation listed on the
STSOL can be sponsored for the short-term stream of the TSS visa.
• The Medium- and Long-term Strategic Skills List (MLTSSL): lists occupations ‘of high value to theAustralian economy’ and aligned to the government’s longer-term training and workforce strategies.
There are 216 occupations on this list. Occupations on this list can be sponsored for the medium-term
stream of the TSS.
• The Regional Occupation List (ROL): includes 77 other occupations. Occupations on this list can besponsored for the medium-term stream of the TSS. The Regional Sponsored Migration Scheme(RSMS) was also based on an occupation list before the program was closed in 2019.

Practical issues concerning skill shortages and occupational lists
Reliance on ‘skill shortages’ as a rationale for migration poses the risk that employers (either individually orat the industry-level) can claim shortages rather than adjusting wages. To this end, a recent parliamentary
inquiry recommended the development of ‘accepted definitions of acute skill shortages’ taking into account a
range of factors, including recruitment difficulty, the duration of the shortage, the number of job vacancies,
and the critical nature of the occupation (Joint Standing Committee on Migration 2021, p. x).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Skills shortages are also subject to employer preferences. The Grattan Institute points to evidence that
employers adjust their expectations of prospective hires depending on the state of the labour market.
When unemployment is high and workers are plentiful, employers are more selective about who theyhire. When employer demand increases and unemployment is low, employers become more willing tohire people regardless of their education and experience. (Coates, Sherrell and Mackey 2022, p. 23)
This is not to say that the concept of skill shortages is without value, although much depends on theirdefinition. Problematically, skill shortages are often defined as difficulties in hiring at current levels of
remuneration (Boyton 2022). Instead, shortages should be identified where employers have difficulties inhiring even after significant wage increases rather than ‘at current levels’.
The Productivity Commission has previously highlighted practical concerns about the accuracy of skill
shortage lists as they are used in vocational education. Shortages have remained on the National Skills
Needs List for several occupations for up to a decade, despite some occupations requiring traineeships
taking one to two years to complete (PC 2021a, p. 329). This shows the importance of how lists areconstructed and updated.
In addition, occupation lists can also entail significant compliance costs for both migrant workers andsponsoring employers. Eligibility is often governed by multiple lists, leading to administrative burden andregulatory misalignment (Coates, Sherrell and Mackey 2022; Joint Standing Committee on Migration 2021).

Staying up to date
Where lists are slow to update, they risk excluding new occupations that may be more relevant to firms on
the frontier of innovation. Unless an occupation is categorised via ANZSCO,14 it is not possible for a shortage(or the occupation itself) to be identified (Joint Standing Committee on Migration 2021, p. 8). As described by
VETASSESS:… ANZSCO has only undergone minor revisions in 2009, 2013 and 2019 to address selected
emerging occupations, specialisations and region-specific issues. That is, there has been littlechange over the course of two decades. (sub. 157, p. 3)
Indeed, it was only in late 2019 that the ABS provided advice regarding the ANZSCO classification of ‘Data
Scientist’ for migration purposes (Coates, Sherrell and Mackey 2022, p. 24).
In addition, the current use of occupation lists can prevent migrant workers from taking up alternative jobs,
including those that would make similar or better use of their skills. This is because their visa status is tied toa strict definition of their occupation.
If the occupation lists were abolished, workers would no longer be forced to work in one specificoccupation. Currently, if an ICT customer service officer is offered a new job focused on market
research, they would have to demonstrate their ability to perform the job and gain a new visa.
(Coates, Sherrell and Mackey 2022, p. 50)
More broadly, occupation lists are likely to cater to industries where several (larger) employers are able toestablish the need for migrant skills, but may restrict access from individual firms that hold unique, legitimate
commercial needs. In this sense, they can make skilled migration less responsive to the needs of frontierfirms. These effects are compounded when occupation lists are the basis for permanent migration as it
favours more static occupations rather than new forms of work that demand similar skills.

14 The Australian and New Zealand Standard Classification of Occupations (ANZSCO) provides a basis for the

standardised classification of occupation data for Australia and New Zealand.
34

Improving productivity through migration

A further practical issue relates to the need for — and lack of — timely data to identify skills shortages in realtime. The Grattan Institute points out that:
Crucial parts of the skills shortage story — such as vacancy and wage data for occupation groups —are scant. Without this information, it is very difficult to generate reliable lists of occupations in shortage
beyond simply accepting claims from employers. (Coates, Sherrell and Mackey 2022, p. 23)
In some cases, additional visa subclasses are required to capture highly valued occupations that are
excluded by the applicable skilled occupation list. As discussed in volume 4, the Global Talent (Independent)
visa (subclass 858) is used to target 10 specific sectors, including ‘DigiTech’, ‘Agri-food and AgTech’ and‘Financial Services and FinTech’.15 In addition, several technology companies were accredited as sponsors
under the Global Talent (Employer Sponsored) program, which allows sponsorship that is not restricted tooccupation lists (Home Affairs 2021d).16
Overall, skilled occupations lists are not useful tools for migration policy. However, if refined to better
capture conceptually sound measures of shortages, such lists can (and already do) have other valuable
uses. For instance, well-researched and regularly updated lists can be used for planning andforward-looking policy formation.

Finding 7.2
Opportunities to improve current migration settings
Australia’s visa program streams vary significantly in their contribution to productivity. In some cases, thebalance of the migrant intake has shifted in the past decade toward visas that make relatively poor
contributions.
Greater usage of temporary skilled migration would improve productivity. One way to facilitate greater
uptake would be to continually improve the administrative efficiency of the approval process. Another,more fundamental reform, would be to re-design the employer-sponsored temporary skilled visa, including
how it is targeted and how well it meets the needs of employers and employees.
Both employer-sponsorship and points-based systems can play important roles in permanent migration.
Employer-sponsorship provides more certainty of labour market outcomes, but there would be value in
better targeting sponsorship in terms of skills, occupations, and age. A well-functioning points-based
system can also play an important role in attracting migrants with valuable skills and characteristics, aslong as the selection mechanism is sufficiently linked with the needs and preferences of employers.
Skilled occupation lists have major limitations when used as a criterion for permanent migration: they areconceptually ill-founded in their current form and difficult to accurately construct and update. Nonetheless,outside of migration policy, adapted forms of such lists may be useful for workforce planning more generally.

15 There are 15 000 visa places available under this program in 2021-22 and workers do not need to be employer

sponsored (Home Affairs 2021e). Places in the Global Talent Independent visa category were awarded in the following
priority sectors: Digitech (34%); Health Industries (23%); Energy (17%); Financial Services and FinTech (12%);
Resources (7%); Defence, Advanced Manufacturing and Space (6%); Agri-food and AgTech (0.9%); Infrastructure andTourism (0.4%); Education (0.3%); Circular Economy (0.1%) (Home Affairs 2021a, p. 11).
16 As at end February 2022, these include Amazon, Culture Amp and Refinitiv (Home Affairs 2022a).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

2.3

A better targeted migrant intake

A coordinated suite of reforms is needed to improve the composition of the migrant intake and to better
promote productivity.
The balance of the permanent migration intake needs to shift away from skilled visas that contributepoorly to (or indeed detract from) productivity, wellbeing and other objectives.
The migration program should form stronger links with the needs and preferences of employers in the labour
market by better recognising ongoing employment and income levels, as well as (but not necessarily)
employer sponsorship. To the extent that policy settings can more directly reward labour market outcomes,
this reduces the need to rely on characteristics and identifiers to predict labour market potential (likecredentials). It can also provide a means of avoiding reliance on skilled occupation lists.
For permanent migration, selection criteria and other mechanisms used to determine eligibility should becalibrated in recognition of age-related fiscal risks. Because such risks do not apply to temporary
migration, a better-designed temporary skilled migration visa could improve the value proposition of
temporary migration (for instance, given the costs of relocation) without the fiscal risks of permanent
migration. In particular, sponsored temporary migration of sufficiently long duration can meet the needsof migrants and employers alike (while remaining compatible with pathways to permanent residency).
Improving the pathways from temporary to permanent residency can reduce the risk ofunderemployment given the evidence that qualifications are a necessary but not sufficient condition foraccess to skilled occupations in the labour market. In particular, this involves shifting away from thepresumption that qualifications will, in their own right, lead directly to permanent residency. Rather, obtaining
an Australian qualification might reasonably be accompanied by a temporary visa that allows sufficient timeto test the labour market and undertake some early-career work, which could then feed into eligibility forpermanent migration.
In light of this suite of changes, pathways from temporary to permanent migration should acknowledge therelevance of migrants’ first arrival in Australia as the time from which their contributions to productivity andfiscal outcomes begin. At the same time, the targeting of the migrant intake would be improved if steps weretaken to avoid creating backlogs where possible, particularly if merit-based systems are designed to allow
the top-most qualified applicants to be accepted each year.

2.4

Abolish business visas

As noted above, BIIP visas have made small contributions to their primary purpose of attracting newinvestment to Australia and have been associated with poorer (negative) fiscal outcomes compared withother skilled visas. In some cases, the BIIP outcomes reflect policy settings that could be improved (e.g. by
amending conditions regarding the type, threshold, and duration of investment). However, the outcomes
reflect a flawed initial concept — the types of investment targeted by the Significant Investor and Premium
Investor Visas are unlikely to benefit greatly from a designated visa stream.
There may be a valid role for a visa stream that caters to entrepreneurs (as opposed to employees), but thiscan and should be captured as part of an improved points test for the Skilled Independent visa.
Given the small number of such visas, the costs of business visas account for a small fiscal liability in absoluteterms. However, each permanent visa granted under the BIIP scheme also crowds out an alternative visa. If all
5000 of the BIIP visas slated for 2022-23 were replaced with a Skilled Independent or Employer Sponsored visa

36

Improving productivity through migration(with no other changes to those programs) the fiscal difference over the lifetime would be $2.5 to $3.4 billion in netpresent value terms. There is no case for retaining this category of permanent visa.
Removing the visa also limits the fiscal impact of secondary applicants given that they are much morecommonly associated with BIIP visas. This is a straightforward way to shift the balance away from poorer
performing skilled visas to those with greater contributions to job matching and fiscal returns.

Recommendation 7.1
Abolishing investor visas
The Australian Government should abolish the Business Innovation & Investment visa program.
Temporary migration should be facilitated for people with genuine plans to start a business in Australia,
while pathways to permanent residency should involve the revised Skilled Independent visa, based on apoints test that better accounts for income levels and age.

2.5

Replace skill lists

As discussed above, skill lists are permeated with deep flaws. These have been widely recognised by moststakeholders, though many advocate repair rather than removal.
• The Joint Standing Committee on Migration (2021, pp. 41–42) recommended that multiple lists could be
combined in order to align pathways to permanent residence.
• CEDA (2019) recommended greater transparency in the data and methods used to devise the lists;
reviewing the ANZSCO) codes to better align them with technology and labour market trends; andchanging governance arrangements (similar to the Migration Advisory Committee in the United Kingdom)
to undertake analysis, consultation and advice on the formulation of skilled occupation lists.
However, the Productivity Commission doubts that sufficient repair is feasible for the purposes for which thelists are intended for the reasons highlighted earlier. The conceptual underpinning of list of occupations withshortages is weak, it is hard to see how a bureaucratic process could keep up with the many changes in
occupations that emerge over time, and they fail to deal with the heterogeneity within any occupation,
however finely tuned. Above all, giving more weight to employer-nominated migration with income thresholds
takes advantage of the specific needs of businesses, and include facets that are missing from lists. These
include specific experience, proficiency in given tasks within an occupation, the capacity to communicate andsubtle factors like connections with peers, personal skills and motivation.
Moreover, to the extent that an occupation is relevant to labour market success, that role, if any, can beincorporated into an empirically-based points-based system (as described below).
The Productivity Commission agrees with the Grattan Institute (Coates, Sherrell and Mackey 2021, p. 62)
that skills lists have little place in migration policy and should be removed.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

2.6

Using income levels as benchmarks and thresholds

Implementing wage thresholds, higher than the current TSMIT would be a simpler and more effective way ofidentifying skills and occupations valued by employers than skill lists, an idea first proposed by the Grattan
Institute (Coates, Sherrell and Mackey 2021, 2022; Coates, Wiltshire and Reysenbach 2022). Under this
proposal, employers in any industry could fill vacancies via a sponsored temporary or permanent visa
(subject to planning caps), so long as the relevant wage thresholds were exceeded. The proposal would
strengthen the link between labour market needs and migration flows, and promote productivity and positive
fiscal outcomes given the link between these.
Government can manage the risks from setting higher income thresholds by setting sensible thresholds and,introducing carve outs from the threshold in exceptional cases. Other visa categories provide an automaticmechanism for catering for the needs of some employees and communities without the need for new policy.

Determining thresholds
Views about the desirable level of thresholds — which are already in use for some visa categories — depend on
the design of the overall migration system. The Grattan Institute suggested a threshold of $70 000 for
employer-sponsored temporary migration and of $85 000 for employer-sponsored permanent migration (Coates
and Reysenbach 2022; Coates, Wiltshire and Reysenbach 2022), which is consistent with dropping skills lists
altogether. These are reasonable thresholds given it also supports abandoning skill lists, but acknowledges
setting the exact number requires judgment. (As argued below, the Productivity Commission also recommends
that the permanent visa threshold should rise above $85 000 once a certain age limit is reached).
Thresholds around the levels specified above are high enough to make skill lists redundant and to avoid
concerns about displacing lower-wage incumbent workers, and low enough not to eliminate migration ofmany valued skilled workers. The two-tier nature of the thresholds takes account of fiscal considerations.
Permanent migrants have rights to Australian social security and taxpayer-funded human services, so thatthese costs need to be offset by the returns they provide to the economy when they are working. There areno equivalent problems for temporary migrants, who must insure against the costs of government services.
All thresholds have boundary problems. There will be valuable migrants who fall just below the relevant
thresholds, but this will always hold, including for the current TSMIT. Notably, wages for higher skill levels,
occupations and industries are often above even relatively high thresholds (figure 2.8 and figure 2.9). In any
case, thresholds should not be set rigidly. They will need to maintain some degree of relativity withmovements in average wages over time or they will no longer have their intended effect, and if they are toohigh or too low, periodic reviews should alter their levels.
There are alternative thresholds to the Productivity Commission’s (and the Grattan Institute’s proposal), but
none look superior. The Australian Industry Group (2022) and Australian Chamber of Commerce andIndustry (2023) cautioned against large increases to the income thresholds, but this would work against
eliminating skill lists. The ACTU had suggested the TSMIT be set in line with Average Weekly Earnings(equivalent to $90 917 at the time of this report) (ACTU 2022a, p. 16)17 but would excessively undermine therole of the migration system in attracting skilled workers. An alternative approach would a hybrid of thecurrent migration system that maintained skill lists for some wage thresholds and removed them above ahigh level. For example, the Business Council of Australia suggested that above a threshold of $92 000,

17 In 2018, the ACTU also suggested that consideration should be given to setting the TSMIT at level equivalent to

Average Weekly Earnings, and that as a more immediate measure, the TSMIT be raised to $60 000 in order to make up
for a lack of indexation.
38

Improving productivity through migration

employer-sponsored migration could occur without restriction from a skilled occupations list; while for jobs
paying between $92 000 and a lower bound (to be determined by government) employer-sponsoredmigration could occur with the use of an improved occupations list (where the lower bound should be no
more than $65 000) (BCA 2022, pp. 14–16). This is an imaginative option, but is still subject to the flaws ofskill lists (albeit reducing their risks). CEDA recommended creating a stream for high-wage, low-risk
migration above a threshold of $120 000, while also raising the TSMIT for temporary migration to $66 000(Ball 2022, p. 13).
While differentiating thresholds between temporary and permanent visas has a strong foundation, thequestion remains whether there are any other dimensions along which thresholds should vary.
Figure 2.8 – Distribution of salaries compared with TSMIT
Annual income for all employees by skill level, 2022
200 000
180 000

Skill Level 1

Skill Level 2

Skill Level 4

Skill Level 5

20.0

40.0

Skill Level 3

Annual income ($)

160 000
140 000
120 000
100 000
80 00060 000TSMIT

40 000
20 000
0
10.0

30.0

MedianPercentile

60.0

70.0

80.0

90.0

Source: ABS (Employee Earnings, August 2022, Cat. no. 6337.0).

39Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Figure 2.9 – Distribution of salaries by income and occupation, all employees
Percentage of industry workforce above selected salary thresholds, 2021
Above $130000

Above $83200

Above $62400

0.1

0.4

Other services
Arts and recreation services

Health care and social assistance
Education and training
Public administration and safety
Administrative and support services
Professional, scientific and technical services
Rental, hiring and real estate services
Financial and insurance services
Information media and telecommunic-ations
Transport, postal and warehousing
Accommodation and food services

Retail trade
Wholesale trade
Construction
Electricity, gas, water and waste services
Manufacturing
MiningAgriculture, forestry and fishing
0.0

0.2

0.3

0.5

0.6

0.7

0.8

0.9

1.0

Distribution of income in different occupations, 2022
250 000

Managers
Professionals
Technicians and trades workers
Community and personal service workers
Clerical and administrative workers
Sales workers
Machinery operators and drivers
Labourers

Annual income ($)

200 000

150 000

100 000

TSMIT
50 000

0

10.0

20.0

30.0

40.0

MedianPercentile

60.0

70.0

80.0

90.0

Sources: ABS (Characteristics of Employment, Australia, August 2021, Cat. no. 6333.0); ABS (Employee Earnings, August
2022, Cat. no. 6337.0).

40Improving productivity through migration

Should there be a regional dimension?
There has long been a concern to meet the skill needs of regional Australia. These can be different, as
evident during the resources boom, when there was an imperative to attract skilled labour to remote areas,
and for professions like general practitioners that can be in short supply in some regional areas. However,arguments that the thresholds should be different across regions are not compelling:• Shortages are often resolved through high wages. A floor for an employer-sponsored visa can readily be
exceeded and so the proposed thresholds do not bind in that instance.
• Regional areas have long been served by visa streams other than employer sponsorship — such as
working holiday makers for temporary migrants — which can relieve the needs for certain types oftransient lower-wage workers. International students in regional universities can also provide labour inareas where there are regional universities.
• Regional skill shortages are often due to barriers to geographic mobility other than visa status.

Age is a consideration for income thresholds and eligibility for permanent
employer sponsored visas
While $85 000 for permanent employer-sponsored migrants is a good starting threshold, there are strong grounds
for it to rise with age. While some employers may require more experienced people to fill higher-level vacancies,
doing so via permanent (as opposed to temporary) migration comes at higher fiscal costs, given that modellingsuggests skilled migrants have a negative expected fiscal impact above 48 years of age (Varela et al. 2021). This
problem could be resolved by raising the income threshold with age, but removing eligibility for a permanent
employer-sponsored visa at some older age. Complexity would be reduced (and certainty for applicants andemployers increased) by only having a few age-dependent thresholds, rather than a continuously rising level. No
age limit or relationship between age and income thresholds should apply to temporary employer-sponsored visas
as there are no equivalent fiscal considerations.
The age limit for permanent employer-sponsored visas should consider the onshore labour market
experience of applicants who were formerly in Australia on temporary visas. As noted in section 2.1, amigrant’s true fiscal impact over their lifetime includes their stay from the ‘date of first arrival’, which may
include continuous periods under temporary migration visas (including bridging visas). It would becounterproductive for permanent residency pathways to punish migrants for holding temporary visas (whichallow migrants to prove their value in the labour market). Doing so may discourage some highly able people
from applying for temporary migration visas if they see that as the pathway to permanency. Accounting for a
migrant’s age and continuous periods of temporary migration may require evidence of labour market
outcomes over the duration of their stay.

Recommendation 7.2
Implementing wage thresholds for employer sponsored visas
The Australian Government should remove current list-based restrictions for employer-sponsored
temporary and permanent skilled visas and set an income threshold well above the Temporary Skilled
Migration Income Threshold rate. The income threshold that applies to temporary migration should belower than for permanent. The income threshold for employer-sponsored permanent visas should increase
with age, though at some older age, people would no longer be eligible for this visa category.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

2.7

Reforming the points-based system

As for employer-nominated visas, being on a skills list would no longer be a prerequisite for eligibility for the
points-based visa stream. However, any characteristic of an applicant, including their occupation, could
independently feature in the model determining eligibility so long as its inclusion was a material andempirically-verified predictor of positive labour market and fiscal outcomes (as discussed further below).
Prima facie, the points-based system could place more emphasis on ongoing employment and its quality (in termsof skill and income level) which would help to improve the composition of the skilled independent migrant intake.18• Points could be awarded for current employment at a sufficiently high skill level, weighted by income level
for a given age group. This would help to identify applicants who are outperforming their peers at different
stages of their career.
• Points awarded for work experience could also be weighted by income level, to better reflect quality rather
than simply duration.
• Additional points could be awarded to secondary applicants for their current ongoing skilled employment andaccording to current salary level. This would help to better acknowledge the impacts of secondary applicants.
Accounting for the interaction between age and income would be useful given that income varies over thepeople’s lifetimes. For instance, people earning an income of $80 000 or $90 000 would be well above the median
if they were aged under 30 years, but below the median for those aged 35 to 55 years (figure 2.10). Any
advantage given to applicants at those income levels would disproportionately favour those at older ages. A set ofincome thresholds or benchmarks would help identify high achievers within different age-groups.
Figure 2.10 – Salary thresholds have implications for the applicants affected
Median wages by age, 2022
100 000
90 000

Annual income ($)

80 00070 00060 000TSMIT

50 00040 00030 000
20 000
10 000

0
15–19

20–24

25–34

35–44

45–54

55–59

60–64

65 andoverMedian for
all ages

Source: ABS (Employee Earnings, August 2022, Cat. no. 6337.0).

Such changes would also better acknowledge the role of age in the points system. For instance, more points
are currently awarded for people in the 25–33 year age bracket than in the 18–25 year age group. This

18 The points system already recognises skilled employment experience. However, the points allocated to work

experience are geared towards past experience, benefiting applicants who are 8 years into their career.
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Improving productivity through migrationmeans that a person with a high-paying job at age 24 years is treated as less desirable than someone withthe same job at age 26 years.

Continuous improvement of the points system
The points system should be reviewed regularly and subjected to ongoing econometric analysis to re-assess
and refine the factors that lead to good labour market and fiscal outcomes.19 The evidence suggests thatbeyond the changes related to age and income discussed above, there are other factors whose weight in the
points-based system should be re-assessed.
It is important that the weight given to different educational qualifications reflects their value in the labour
market. For instance, if doctorate degrees are not associated with improved labour market outcomes, theyshould not be given additional points above Bachelor or Masters qualifications (although this may vary by
field of study). At the same time, professional credentials (such as chartered status for engineers andaccountants) have strong links to employment outcomes. Where there is evidence of a strong link with
employment outcomes, such credentials could also be rewarded under the points system.
It may also be possible to refine the treatment of the migration unit, to better capture the fiscal effects ofsecondary applicants. This already occurs to some degree in the points system, but could be refined with
better empirical evidence over time.
Table 2.4 – The points system for the Skilled Independent visa could be improvedb
Points Potential improvement
Age

The points awarded for the 25–33 year age group should be in line

At least 33 but less than 40 years

25 with the 18–25 year age group.
Additional points should be awarded according to current salary30
level, with the thresholds and points varying by age group.
25

At least 40 but less than 45 years

15

45 years and over0

At least 18 but less than 25 years
At least 25 but less than 33 years

Overseas skilled employment

The points allocated to work experience are geared towards pastexperience, benefiting applicants who are 8 years into their career.

Less than 3 years

0

At least 3 but less than 5 years

5

At least 5 years but less than 8 years

10 for a given age group, as this would produce a better indicator of

At least 8 years

15 labour market outcomes.

Australian skilled employment

0Less than 1 year

5

At least 1 but less than 3 years

10

At least 3 but less than 5 years

15

At least 8 years

20

However, more emphasis could be put on current ongoing
employment at a sufficiently high skill level, weighted by income level

19 Some evidence suggests that past attempts to better target the migrant intake failed to improve outcomes. For

instance, Tani (2020) highlights that migrants’ skills and qualifications were often underutilised, at times, in spite ofchanges to policy that aimed to target particular characteristics.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Points Potential improvement
Educational qualifications

If doctorate degrees are not associated with improved labour market
outcomes, they should not be given additional points above Bachelor orDoctorate

20

Bachelor

15

Diploma or trade qualification

10 met through facilitation of employer sponsorship.

Occupational qualification

10 Additional points could be awarded for other professional
qualifications, such as chartered or registered status.

English language skills
Competent
ProficientSuperior

technical needs that could not otherwise be met, these needs should beEnglish language skills should be presumed to be proficient for
0 migrants from English-speaking countries, or for those who have had
certified English training in their home country. Tertiary education
10
providers should be encouraged to certify students’ English language
20 skills as evidenced through the completion of their studies.

Partner skills
Depending on age, English language,

Master’s qualifications. Given that doctorate degrees fill specific

It may be reasonable to consider the outcomes of partners.
5–10

nominated skilled occupation, andskills assessment
OtheraUp to 20

a. An additional 5 points (each) is allocated to eligible applicants who meet the following criteria: Australian study
requirements; professional year in Australia; credentialled community language; and study in regional Australia.
Source: Department of Home Affairs.

Other improvements may be possible, including to the treatment of English language skills. While the Productivity
Commission (2016b) previously found that English language skills are a useful predictor of labour market
success, it may be possible to more efficiently test and certify them. For instance, English language skills could bepresumed to be proficient for migrants from English-speaking countries, or for those who have had certified
English training in their home country. Australian tertiary education providers could be authorised and encouraged
to certify students’ English language skills as an additional part of the completion of their studies.

Recommendation 7.3
Improving Skilled Independent visas
For the Skilled Independent visa (subclass 189), the Australian Government should remove current
list-based restrictions, but the points system should be able to award points for any factors shown to be
associated with fiscal and employment benefits. Additional points should be awarded for ongoing
employment in Australia according to income level, with different income benchmarks for different age
groups. Moreover, the design of the points system should be updated regularly based on empirical research.

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Improving productivity through migration

2.8

Meeting employment needs in human services andcare work

The largely-publicly-funded human services sector (which includes aged and disability care) faces complex
labour and skill needs. The sector has often relied heavily on migrant labour to meet service demand,reflecting both ongoing growth in demand (due in part to population ageing) and factors limiting domestic
labour supply. Shortages of labour are endemic, affecting the quality of care for vulnerable people. It has
proven particularly difficult to attract workers in aged care, an issue that is likely to intensify given policy
initiatives to raise staff-to-resident ratios, accompanied by the pressures of an ageing population(CEDA 2021b, pp. 14–15). To meet the 2023 target for additional caring time for residents, caring staff
numbers would need to rise by more than 12% from 2022 to 2023 (Sutton and Ma 2022). Capacity
constraints, among other factors, have led to long and growing waits for access to services (PC 2022f).
Adding to these workforce pressures, a recent survey found that 75% of workers were considering leaving
the sector in the next five years (PC 2022b, p. 77). With regard to the aged care workforce:
Many recent reviews have diagnosed a plethora of issues that have made the sector acomparatively unattractive and difficult place to work. The sector has struggled to attract andretain enough staff to keep pace with the demand for care and support services as the number ofAustralians aged over 65 years has continued to grow. The past few years have seen the
expansion of home care in particular, as more older Australians choose to live at home for as longas feasible. … Based on the current trajectory, various projections point to an increase in thisshortfall of care workers over the coming decades. (PC 2022c, p. 3)
Difficulties in recruiting in the disability sector are equally severe (NDS 2021).
The Productivity Commission’s recommendations to increase the wage threshold for eligibility for Employer
Nominated and Skilled Independent visas could aggravate these shortages by reducing the supply of
lower-paid migrant workers in some caring occupations and industries. The degree to which this occurs
depends on the relative importance of skilled migrants in caring occupations and associated industries, andthe likelihood they will lose eligibility for migration under the new system. The evidence suggests that
low-paid skilled migrants are not the main source of overall migrant labour supply in the relevant parts of thelabour market:20• In 2016, skilled temporary and permanent migrants accounted for 36% of all migrants working as carers andaides, while they accounted for 43% of all migrants working in residential aged care. The remaining migrants
working in these occupations and industries were predominantly from the humanitarian, New Zealand, student
and family migrant streams, which are not affected by the proposed changes to skilled migration visas.
• Moreover, skilled migrants in caring occupations and industries are often employed as professionals. Theirtypically higher pay rates means many of these are likely to remain eligible for the new skilled streams.
The share of skilled migrants working in lower-skilled occupations in caring industries is significantly lower
than the shares shown above. For example, skilled migrants categorised as labourers and community andpersonal service workers (lower-skill occupations) comprise only about 25% of the total migrant residential
aged care workforce.

20 Based on data from ABS 2019, Microdata: Australian Census and Temporary Entrants Integrated Dataset, 2016 and

ABS 2019, Microdata: Australian Census and Temporary Entrants Integrated Dataset, 2016.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Moreover, the Fair Work Commission’s interim decision to raise minimum award wages for direct care
workers by 15% from mid-2023 will probably elicit some additional labour supply — or at least reduce theoutflow of workers.
Notwithstanding these counteracting factors, a shift in visa eligibility thresholds would be likely to worsen
staff shortages. There are several policy options.
One possibility is to leave it to the labour market to resolve any emerging shortages, letting wages rise sothat people shift from other parts of the economy into the caring sector. However, while wage adjustments inlabour markets are usually effective in moving labour around the economy, this dynamic may be lesseffective in this critical area:• Governments are key funders of care services. While larger and more regular wage increases may bepossible, the growing demand for care workers discussed above and the financial difficulties experienced byproviders will magnify the fiscal pressures facing government.21 Governments have many competing spending
priorities. This constrains their ability to increase spending on any one area without significant tax increases,
which have their own negative impacts on growth and efficiency (via the marginal excess burden of tax).
• There are non-wage barriers to labour supply from incumbent Australians, such as geographic barriers(given that service delivery often takes place at the service user’s location) and mismatch of skills andpreferences (given that face-to-face care work, while technically lower-skilled, would not suit everyone’s
capabilities or preferences).
• Attracting and retaining carers may depend not only on entry-level wages, but expected incomes over a
person’s career. In some care positions, there is likely to be limited scope for the kind of income
progression that might occur in other industries (via promotion to managerial positions, movement tohigher-paying firms, or by increasing productivity at the individual level).
One measure that could sidestep the fiscal constraints governments face in meeting growing needs for agedcare services would be a new model designed to ensure sustainable funding of aged care. In its report into
Australia’s aged care system, the Productivity Commission proposed re-balancing public and private
contributions to create a sustainable source of revenue (PC 2011a, chapter 8). There are alternatives that
could achieve similar outcomes, such as a universal competitive mandatory insurance scheme (Ergas andPaolucci 2011). The formula determining the combined private and public funding could be set at a levelsufficient to pay the wages to attract workers to aged care form either Australian citizens or, where wages
were high enough, from the new skilled visa streams.
In the absence of such new funding models and the risk of government fiscal constraints, there may be grounds
for a specialist visa stream for caring skills that would set a lower wage threshold than recommended by the
Productivity Commission for other skilled visas. For example, CEDA suggested an ‘Essential Skills Visa’ for areasof ‘critical need’ such as aged care, childcare, disability or healthcare, and require appropriate qualifications,
English proficiency, and a job offer from an Australian employer (p. 20). They noted that this would recognise:… there is considerable unmet demand for labour in areas like aged care, where there are
currently no direct work-visa pathways. Eligible occupations would be tightly controlled, withregular enforcement and compliance to prevent misuse and exploitation. (Ball 2022, p. 13)
Canada has a similar scheme — the Home Support Worker Pilot – though it is more targeted than CEDA’s model.
Essentially, targeting a visa by occupation or sector is similar in principle to the current use of occupational
lists. However, its deliberately restricted scope would mean that the practical challenges of identifying
21 For example, 55% of residential aged care providers were making net losses in 2020-21 (DOHA 2022, p. 4). Losses

per residential aged care resident for directly-provided government services were about five times the average (p. 122).
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Improving productivity through migration

shortages would be limited — likely to services where governments play a significant role as provider,
funder, and regulator. Reliance on the list would be limited to one visa stream, and only in the context ofreformed Employer Nominated and Skilled Independent streams.
A visa stream that targeted human services would also need to ensure that applicants worked in those
occupations for a significant period of time, without unduly restricting job mobility between businesses andagencies. (The capacity for mobility is critical to avoid the risk that an employer could lower employment
standards by threatening visa cancelation if the worker did not comply.) This is similar in principle to the useof Regional Sponsored visas, which require a period of time be spent living in a regional area, but ultimately
allowing broader movement later on. A period of 3–4 years may be appropriate as a minimum amount oftime spent in the identified sectors.
Given that skilled migration is not the primary source of migrants working in lower-paid parts of caring
occupations, the scale of any new specialist visa stream may not need to be large. It would also be
undesirable to set in stone any new specialist visa category as there may be other developments in the
caring occupations that increase domestic supply — such as better working conditions and improving theattractiveness of caring as a profession (Swerissen 2022). In addition, the Fair Work Commission has not
ruled out additional minimum pay increases following its interim determination, which will affect the domestic
supply of labour. Consequently, the specialist visa should be a pilot.

Recommendation 7.4
Meeting the needs of human services without stifling wage increases
The Australian Government should introduce a pilot of a special permanent visa subclass for occupations
in human services sectors largely funded by government (such as aged and disability care), but only ifthese are facing likely enduring and significant labour shortages that are weakly responsive to wage
increases. The visa subclass should be subject to the current Temporary Skilled Migration Income
Threshold, and include a condition that the applicant remain employed in the relevant sector for 4 years.
The pilot should be evaluated for its impacts and need after several years.
It should also be abandoned if the Australian Government develops sustainable alternative funding
options for aged care that are sufficient to meet the wage increases required to limit labour shortages.

2.9

Temporary migration and pathways to permanent
residency

Temporary skilled migration plays two roles: it caters to workers and employers who have an immediate
commercial need, with no intention of extension to permanence; and it presents a pathway for migrants to‘try before they buy’ and decide whether they wish to adopt Australia as a permanent home. Between
2000-01 and 2013-14, 55% of temporary skilled visa holders transitioned to permanent residency (Treasury& Home Affairs 2018, p. 21). Both roles could be enhanced, particularly in the context of recommended
changes to permanent migration.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Facilitating longer-duration temporary skilled migration
A better-designed temporary skilled migration visa could reduce employers’ reliance on permanent migration— which produces less fiscal benefits and is subject to annual caps. A re-designed visa could also address
the risk under the Productivity Commission’s refined eligibility criteria for the permanent stream that thelabour market could lose the skills and expertise of more experienced and older migrant workers (particularly
if they are not attracted to the limited duration of the TSS visa).22
Increasing the duration of temporary migration would better cater to the medium-term needs of migrants andsponsoring employers. As the Business Council of Australia noted:
Two years is too short a time for many migrants who are weighing up the costs and uncertainty
involved in moving to Australia. It is also often too short a stint for potential employers, especiallygiven the months it takes to process visas and then bring people into the country and get them
up-to-speed. (BCA 2022, p. 26)
To the extent that the targeting of the TSS is improved, and applicants contribute complementary skills in thelabour market, there is likely little downside risk from allowing longer durations of temporary skilled migration. An
allowed duration of somewhere between 5 to 7 years would make the costs of relocation more worthwhile andextend the share of a migrant’s career spent in Australia, while avoiding the fiscal costs of the retirement phase.
The exact duration should be subject to consideration of short-term impacts on State and Territory services,
housing and urban planning, and Australia’s overall ability to absorb increases in the population. However,there is likely to be significant value in gradually increasing the duration of the TSS to make the visa more
attractive to migrants and more worthwhile for employers.

Temporary to permanent pathways
Strengthening the pathway from temporary to permanent migration help attract and retain talented skilledworkers (BCA 2022; CEDA 2022b). The time spent by temporary migrants in the labour market allows themto test their relationship with their sponsoring employer(s) and their value in the broader labour market(particularly if changes are made to improve labour mobility, discussed in section 2.11). The evidence showsthat temporary visa holders with higher incomes also achieve higher rates of wage growth (figure 2.11). For
government, the labour market experiences of temporary migrants helps identify those most suited to gaining
permanent residency.
These pathways could help to reduce underemployment among migrants with high-level qualifications, given
the evidence of mismatches (discussed in section 2.1) suggests that qualifications are a necessary but not
sufficient condition to work in skilled occupations. The risk of underemployment could be reduced by shifting
away from the presumption that qualifications will, in their own right, lead directly to permanent residency.

22 The medium-term stream of the TSS visa has a duration of 4 years (or 5 years for Hong Kong residents) with thepotential to apply for renewal, while the short-term stream is up to 2 years (Home Affairs 2021c).
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Improving productivity through migration

Figure 2.11 – Temporary skilled migrants with higher starting salaries have stronger
wage growth

Average annual wage increase (%)

Average annual wage increase during temporary skilled visa
6
5
4
3
2
1
0

Starting annual nominated salary ($)

Source: Coates et al. (2022).

Pathways for recent graduates
This shift to better recognition of employment and income in permanent migration is also relevant tointernational students who have completed an Australian qualification but lack proven experience in thelabour market. As noted by Prof. Julia Horne:
The policy settings for this group have for many decades sought to largely prevent international
students from settling in Australia rather than encourage them. Yet, the cohort is young andAustralian-educated, thus potentially able to contribute in significant and long-term ways toAustralia’s future productivity. (sub. 169, p. 2)
A reasonable expectation might be that obtaining an Australian qualification would be accompanied by atemporary visa that allows sufficient time to test the labour market and undertake some early-career work. It
would not necessarily guarantee permanent residency, but would improve the chances of eligibility forpermanent residency. Australian qualifications should be considered as providing opportunities to begin askilled career in Australia, rather than guaranteeing a retirement in Australia.
Australia is likely to face increasing competition for graduates, whose job prospects would often be as strong
in Australia as overseas. Pathways for recent graduates have received renewed attention from policymakers
in other advanced economies following the pandemic, including the United Kingdom, where temporary visa
options open to recent graduates (including those studying outside the United Kingdom) were recently
extended.23 Canada too has a relatively clear pathway for international students to become permanent
residents (VETASSESS, sub. 157, p. 12).

23 The United Kingdom recently implemented a temporary visa to attract recent graduates from a list of universities

ranked in the top 50 (on two or more ranking lists), regardless of their field of study and without the need for an offer of
employment. The visa allows graduates to stay in the United Kingdom for 2 or 3 years, depending on their qualifications,49

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It is important that temporary migration options — such as the Graduate visa (subclass 485) — are of a
sufficient duration to allow graduates to compete as legitimate candidates for entry-level positions.24 This
could be achieved by allowing an extended temporary visa for Graduate visa holders with proof of an
employment offer (subject to skill and/or income requirements). This could help Australia retain more of thebest and brightest locally-trained international students, specifically by rewarding those who successfully
begin careers in highly-skilled and highly-paid occupations in Australia.25

Age at application or arrival?
If the Productivity Commission’s recommendations are adopted to ensure permanent migration visas
account for age-related fiscal risks, this can have implications for the pathways to permanent residency.
For instance, spending more time on temporary visas could be seen as detrimental to a migrant’s chancesof permanent migration, as they would apply for permanency at later ages. This would work counter toreforms intended to encourage more use of temporary migration, and to better use the pathways from
temporary to permanent migration.
Accordingly, in designing thresholds and criteria for permanent migration, it would be valuable to acknowledge
that migrants’ cumulative contributions to productivity and fiscal outcomes accrue from the time of first arrival inAustralia, rather than at the time permanent residency is granted. This could occur, for instance, by awarding
additional points for past work experience that are weighted according to income level (as discussed above).

Recommendation 7.5
Improving temporary migration and pathways to permanent residency
The Australian Government should amend settings for temporary skilled migration to increase theirduration to 6 years, subject to continuous employment (for a set percentage of a given year) with asponsoring employer (with the ability to move to a new sponsoring employer under the same visa).
While temporary skilled migration visas should not come with an expectation of permanent migration,
pathways to permanent migration should be available under revised Employer Nominated and Skilled
Independent visas.
For international students, obtaining a qualification from an Australian tertiary education provider should
be associated with some expectation of being able to test their skills in the Australian labour market, but
not an expectation that their qualification alone will qualify them for permanent residency. The AustralianGovernment should increase the duration of stay for Temporary Graduate visas (subclass 485) for
graduates with Bachelor and higher level degrees, such that an extension to five years is guaranteedsubject to proof of ongoing employment above a set wage threshold.
These changes should be subject to the revised employer-sponsored and independent skilled visas, bothof which would place greater emphasis on age and income (recommendations 7.2 and 7.3).

without the possibility of renewal — rather, they are intended for visa holders to test the labour market and potentially totransition to other streams of skilled migration (Government of the United Kingdom 2022).
24 Graduate visas (Subclass 485) are available in Australia, to graduates from Australian institutions who are current or
recent holders of the Student (Subclass 500) visa.
25 Particularly given that only 16% of Student visa holders transitioned to permanent residency between 2000-01 and2013-14 (Treasury & Home Affairs 2018, p. 21).
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2.10 Avoiding backlogs where possible
Backlogs are an inevitability in any system with caps and an excess demand for visas, but different designsof migration systems have varying implications for their severity and impact. Taking as given thatgovernments set caps based on population policy, the main issue is therefore the degree to which visa
criteria dampens demand. The more than such criteria fulfill that function, the more certainty that this gives
an aspiring migrant that they will be a successful applicant in any given year, which in turn makes Australia
an attractive destination.
Skills lists are one way of rationing places and their abandonment, if not replaced, would tend to expand
demand and increase backlogs (VETASSESS, sub. 157, p. 4). However, there are superior ways ofcontaining demand while meeting Australia’s skilled migration needs. The Productivity Commission’s
proposals for permanent migration eligibility for sponsored and independent visas also include features(income, work experience and age) that reduce demand.
Regardless, oversubscription to visa programs should prompt governments to consider the scope of the migrant
intake, particularly if the eligibility criteria have been well-calibrated to productivity and fiscal outcomes. If, overtime, the Australian Government observes consistent oversubscription from applicants who meet well-designed
criteria and eligibility mechanisms (i.e. that have high-level skills, ongoing employment and good careerprospects) this would be useful in informing decisions about the scale of the migration intake.

2.11 Removing barriers that migrants face in the labour
marketAs discussed in section 2.1, some migrants find it more difficult to get jobs matching their skills than the broader
population. These challenges may be reduced by providing settlement services and assistance with the labour
market transition (including information provision) either by government or industry bodies, as suggested byEngineers Australia. While that may be warranted if the hoped-for labour market outcomes of a permanent
migrant are not realised, the Productivity Commission’s recommended changes to the permanent migration
system (and the transition to it from temporary migration) should significantly reduce the need for such assistance.
A more difficult problem relates to employer preferences for Australian qualifications and local work
experience (Engineers Australia 2021; Tani 2020, Chartered Accountants Australia, sub. 94, p. 3). However,there is likely to be limited scope for policy or regulation to alter such preferences unless they contraveneanti-discrimination laws.
Governments are likely to be more influential in addressing barriers that stem more directly from policy andregulatory settings, which include the:• effect that visa conditions may have on labour market mobility• recognition of skills and qualifications.
Addressing barriers in the labour market would give policy makers a more accurate understanding of thecharacteristics to target in the migration intake. As noted by the Grattan Institute, barriers in the labour
market at an early stage of a migrant’s career can have ongoing consequences for their career path, andhence their lifetime earnings and fiscal impact (Coates, Wiltshire and Reysenbach 2022).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Visa conditions and labour market mobility
Given the required contributions to the Skilling Australians Fund Levy, the (modest) sponsorship application
fee and the on-costs of hiring and training, employers will only be willing to sponsor migrants if there is agood prospect of reasonable tenure. Equally, many sponsored migrants will benefit from an uninterrupted
period of learning on the job. They cannot freely move until a new sponsoring employer has an approved
nomination. Therefore, by design, job mobility is constrained for employer-nominated migrants. Similarly,
employers are subject to conditions if they wish to change the migrant’s routine hours of work or their duties.
These rigidities involve their own impacts. For example, job mobility has economy-wide implications, as it isan avenue for resources to flow to more productive firms in a competitive labour market. For the visa holder,
there is also a balance between expectations of attachment to the sponsoring employer and the risk that if
the restrictions are too significant, they may be subject to an increased risk of exploitation.
Existing arrangements may not have the balance between the gains from enduring attachment to thesponsoring employer and the visa holder. For example, there are grounds for allowing a short period of
unemployment accompanied by job search by a visa holder for another employer willing to sponsor themwithout violating the terms of the visa (Coates, Sherrell and Mackey 2022). Improving the job mobility
associated with employer-sponsored visas should be considered regardless of other changes to those visa
streams recommended in this report. However, such measures will be of greater importance if sponsorship is
made available to a broader set of employers and industries (recommendation 7.2). To the extent that better
job mobility reduce worker exploitation, improving settings for job mobility will be vital if employer
sponsorship is to continue below the ‘high income threshold’ (as per recommendation 7.2).

Recommendation 7.6
Improving job mobility for employer-sponsored visas
The Australian Government should amend settings for employer-sponsored temporary and permanent
visas to better allow workers to switch to competing employer-sponsors including by permitting a shortperiod of unemployment while looking for a new sponsor.

Recognising migrants’ skills and qualifications
There are likely to be opportunities to further improve productivity by pursuing greater recognition ofoverseas occupational licensing, as well as through further reform to the design of licensing schemes. Thisparticularly relates to boundary issues in scope of practice. (The scope of practice defines the activities andtypes of work that are covered by an occupational licence.)
For migrant workers, occupational licensing presents further barriers to obtaining employment in Australia
through requiring additional assessment of their qualifications on top of any skill assessments for immigration
requirements, sometimes at considerable cost to them. This can create a secondary layer of approvals forskilled migrants that, in some cases, could be made more efficient through two mechanisms:• alignment between skills assessments and licence/registration processes• mutual recognition of international qualifications and licenses.
The design of occupational licensing and its use in Australia in the context of other forms of regulation are
discussed in chapter 3.

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Improving productivity through migration

Mutual recognition of international qualifications and licences
A necessary condition for mutual recognition between international jurisdictions is that there is sufficientalignment or equivalence of different licensing regimes as this would preserve the benefits of licensing inpromoting safety and quality of service. Indeed, mutual recognition improves coordination of enforcementand deregistration between jurisdictions. Information is more readily available to regulators about operatorsthat had received sanctions or whose occupational licences had been disqualified in other jurisdictions.
Where mutual recognition is possible, it would benefit productivity by lowering barriers to entry for skilledmigrants, improving the availability of skills for Australian employers. It would also better allow foreign firms
and contractors to provide services directly to Australia (i.e. trade in services).
Australia already has some such arrangements in place. The Trans-Tasman Mutual Recognition Agreement(TTMRA) allows mutual recognition of occupational licenses between Australia and New Zealand.
Furthermore, some occupational bodies have their own international mutual recognition of qualifications andlicences with additional jurisdictions (e.g. Engineers Australia and Chartered Public Accountants Australia).
While the Productivity Commission’s 2015 review into Mutual Recognition Schemes (between Australia and
New Zealand) found many stakeholders supported recognition for registered occupations, in practiceregulators sometimes maintained restrictions. They were rejecting applications because of differences injurisdictional occupation standards required to obtain or retain a licence despite the occupational activities
being substantially the same and/or not making use of conditional licensing to account for differences instandards between jurisdictions (PC 2015b, pp. 131–144).
Expanding international mutual recognition schemes beyond New Zealand would not necessarily change thesource countries of Australia’s skilled migrants but could make the process of recognition more efficient,avoiding unnecessary costs of re-training, and allow better use of some migrants’ skills once they arrive. The
process of expanding mutual recognition schemes could usefully follow the principles established in the
Global Convention on the Recognition of Qualifications concerning Higher Education (the UNESCO
Convention), which provides the framework for broad scale international mutual recognition.
While other international agreements have addressed qualification recognition, the UNESCO Convention is
the first to define that ‘substantial difference’ must be found for a qualification to not be recognised. Thisapproach creates a positive default to recognise international qualifications, rather than not, putting the onus
on the recognition authority to show that there are substantial differences between qualifications. If thisapproach were adopted and expanded to mutual recognition for international occupational licences, it would
shift the onus onto regulatory bodies to show why an international licence is not equivalent for jurisdictions inwhich a mutual recognition treaty is in effect. This could be a useful approach to the (still incremental)
expansion of mutual recognition to more jurisdictions, based on mutual recognition agreements andco-operation between regulators in multiple jurisdictions.
Even where international occupational licences substantially differ from the domestic licences, it may be
useful in some cases for regulators to grant conditional or restricted licenses. This could involve, forexample, restrictions that limit the tasks an international worker could perform if a domestic licence isbroader than its international equivalent. Regulatory bodies would only have the power to refuse registration
if false or misleading information were provided by the international licence holder, or equivalence could not
be achieved by imposing restrictions or conditions.

53Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Recommendation 7.7
Expanding the default recognition of international licences
Australian governments and regulators should pursue further international mutual recognition ofoccupational licences by improving (and potentially formalising) links between Australian licensing bodies
and those in similar countries.

Should international recognition be automatic?
The Productivity Commission’s 2015 review into Mutual Recognition Schemes concluded that the priority
should be on extending Automatic Mutual Recognition within Australia and strengthening the TTMRA. While
there has been a significant expansion of AMR since the 2015 review, there is still a lack of evidence on theeffectiveness of the Australian scheme.
It would be valuable to assess the impacts of AMR within Australia to identify the issues relevant to further
expansion. For instance, it may be possible to assess how the experiences of participating jurisdictions havediffered from those of non-participating jurisdiction, and the impact of exemptions. It will be useful to assess
the incremental expansion of the scheme and disruptions caused by COVID-19.
Expanding the number of jurisdictions with non-automatic international mutual recognition agreements is
also a higher priority than establishing AMR with international jurisdictions. Any expansion of AMR tointernational jurisdictions could be trialled with New Zealand, where the TTMRA has long been in place, toprovide evidence of how effective an international AMR would be.

Alignment of assessments
For jurisdictions where mutual recognition is yet to be implemented, or substantial differences are found between
international and Australian occupational licensing, it would be valuable to align requirements for migration withthe requirements of regulatory bodies. At present, connections between the requirements of the skills assessment
and the licensing/registration requirements do not exist — they are effectively separately assessed.
This can result in skilled persons immigrating through a skilled visa but not able to work in Australia in theirpreferred occupation — either as their qualifications are not recognised or the occupational licence requires
Australian work experience (box 2.4). This essentially redirects parts of the skilled migration intake towards
unskilled occupations (CEDA 2022c, p. 11). This adversely affects a migrant’s early career in Australia,
which can have flow-on effects for their ongoing labour market prospects and productivity.

Box 2.4 – Skilled migrant limbo
The experiences of migrants nurses and electricians provide examples of the inconsistency between theoutcomes of a skills assessment required to satisfy visa eligibility and occupational licensing requirements.
NursesNurses and midwives who want to work in Australia must be registered with the Nursing and Midwifery
Board of Australia (NMBA). For a nurse or midwife with international qualifications to migrate to Australia,
they must undergo assessment of their international qualifications by the Australian Health Practitioner

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Improving productivity through migration

Box 2.4 – Skilled migrant limbo
Regulation Agency (AHPRA) and a separate skills assessment by the Australian Nursing and Midwifery
Accreditation Council (ANMAC).
The outcome of the AHPRA assessment is the determinant for registration with the NMBA, whereas the
ANMAC assessment is used to determine an applicant’s ability to immigrate to Australia.
Both assessments are designed to test the suitability of the applicant to be able to work in Australia as anurse or midwife, however, the ANMAC skills assessment takes into consideration work experience,
which AHPRA (as governed by the Health Practitioner Regulation National Law) does not consider.
Assessment by AHPRA can only consider whether the international qualifications are substantiallyequivalent to an Australian qualification.
For relevant but not substantially equivalent international qualifications, an outcomes-based assessment(OBA) was established in 2020, consisting of both multiple choice and clinical examinations (NMBA 2020).
Electricians
To be legally certified as an electrician in Australia requires a state or territory electrical license. To
obtain an Australian electrical license, applicants must show evidence of their attainment of a
Certificate III in an electrical trade course from a recognised training provider.
On the other hand, to satisfy the requirements of Australia’s migration program, internationally qualified
electricians can have their overseas qualifications and work experience recognised through the Offshore
Skills Assessment Program (OSAP) or the Temporary Skills Shortage Skills Assessment (TSSSA).
But OSAP and TSSSA recognition are not deemed to be equivalent to the Certificate III requirement, andhence suitably recognised internationally qualified electricians cannot legally operate in Australia. Rather,internationally qualified electricians are required to undertake at least 12 months of Australian work
experience under the supervision of a licensed electrician in order to apply for a Certificate III and obtain
an unrestricted electrical licence to work unsupervised.
The requirement for 12 months of work experience can leave internationally qualified electricians in limbo
if they are unable to find an employer that will provide them with supervised work experience.

While expansion of mutual recognition of international licences may be a long-term solution for many
jurisdictions, a useful policy objective in the interim could be to adapt migration assessments to make themconsistent with the criteria for any relevant registration tests. The licensing regimes for nursing andelectricians highlight lessons that could be considered among licensing regimes more broadly. For instance,
registration processes can often be improved through better bridging processes. In cases where regulators
require further Australian work experience for licensing, skilled migration could be closely linked to actual
employment opportunities to ensure internationally qualified practitioners can acquire the local work
experience needed for the licence. Such changes would increase the employability of migrants entering
through the skilled migration pathway, with flow on benefits to productivity.
Alignment between the requirements of skilled migration and occupational licensing would also reduce
duplication of processes. Where the requirements are misaligned, skilled migrants are required to progress
through two separate, but ultimately similar, processes to determine their suitability to work in Australia. This
may involve providing the same documentation to two separate assessors and two different tests to as

55

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportrequired. By aligning the requirements, these processes would be streamlined, making it faster and lesscostly for skilled migrants to enter and begin work in Australia.
There may also be a case for some of the licensing regimes to adapt their approaches to recognisingexperience gained in trusted jurisdictions. As an example, the Nursing and Midwifery Board of Australia only
considers the initial nursing qualification and specifies that only qualifications from a limited number ofjurisdictions26 are likely to meet the registration criteria. Contradictions arise for nurses who may havemigrated from their home country (which is not accepted as a ‘trusted jurisdiction’) to a country that Australia
accepts as a ‘trusted jurisdiction’. In such cases, if the migrant undertakes further education and gains
registration and experience in the ‘trusted jurisdiction’, the Australian registration system would still focus on
their initial qualification.27 If the migration requirements were to move to the registration requirements,
without a mutual recognition system in place, the pool of skilled migrant nurses available to work in Australia
would be unnecessarily limited. In cases such as these, it would be more beneficial for the licensor to loosen
their requirements and align with the skilled migration assessor rather than the other way around.

Potential redundancy of some assessments
Skills assessments are required as part of the Skilled Independent, Employer Nominated and TSS skilledvisas. Assessments are undertaken for migration purposes as an integrity measure (i.e. to ensure anapplicant who is qualified on paper is actually a qualified applicant). As described by VETASSESS:
The assessment of the credentials, relevant experience and other characteristics of migrants
skilled in occupations on the lists, serves the purpose of providing employers with confidence that
migrants have the qualities that match their needs. Which, in turn, makes it more likely that
migrants work in roles that put their skills to their most suited and productive use. In this sense thelists also assist in making best use of migrants’ human capital. (sub. 157, p. 2)
However, this is less likely to be the case where employers have already hired and/or sponsored theapplicants given that they are uniquely situated to determine and observe what skills and attributes are
required for the occupation.
In addition, the assessment process can create compliance costs for all participants, including those using
the system in good faith. The Business Council of Australia noted:
In some occupations, such as for chefs, there is a large backlog created by the fact that there are few
assessors. … For occupations without specific regulatory requirements, this is an additional
administrative hurdle which adds limited value. Employers who are sourcing candidates from overseas
are best placed to determine if a candidate meets the requirements for the role. (BCA 2022, p. 20)
Skills assessments are required for a range of occupations that do not have formal licensing in place. For theseoccupations, skills assessments for migration are undertaken by non-experts (i.e. those not qualified or practicing
in the field). While such assessments can contribute to the integrity of the visa program, it is unclear how muchadditional value they add for applicants who have documented proof of formal qualifications or indeed haveobtained employment or sponsorship in a highly-skilled field. In many cases, these processes would not justify thecosts for both applicants and administration, noting that typical processing times are estimated to be between 12
and 20 weeks for non-trade occupations (VETASSESS 2023).

26 Canada, Hong Kong, the Republic of Ireland, the United Kingdom and the United States are the only jurisdictions

where qualifications are likely to meet the criteria.
27 For example, a nurse with EU qualifications that migrated to the United Kingdom where their qualifications wererecognised (pre-Brexit) and has worked as a nurse in the United Kingdom for several years may be unable to work as anurse in Australia, despite UK qualifications being recognized by the NMBA.
56

Improving productivity through migration

Recommendation 7.8
Aligning migration and occupational license requirements
Australian governments and regulators should coordinate to align skilled migration requirements withoccupational license recognition requirements, including by removing duplication of assessment where
possible.

57

Occupational licensing and registration3.

Occupational licensing andregistration

Key points
Occupational licensing must balance the benefits to consumer protection and the costs of restrictedcompetition. Ineffective or unnecessarily costly regulatory protections reduce productivity for little orno additional consumer benefit.
• Governments should not approach licensing reform as a choice between safety and efficiency. Rather, given thecosts associated with licensing are potentially substantial, licensing should only be used where more cost-effective
alternative options are unavailable, and its coverage kept to the minimum necessary to achieve its benefit.
• Some deregulation has occurred in low-risk occupations, however, there has been a significant expansion ofcoverage and entry requirements for licences aiming to improve health and safety. The balance and designof regulation could be improved.
Better data and evidence of licensing outcomes, particularly their impact on health and safety risks,
would inform more proportionate responses.
• Cost benefit analysis of licensing is often constrained by a lack of evidence, leaving regulators to rely on
partial and anecdotal evidence from stakeholders on perceived health and safety risks.

• Licensing is often used in conjunction with other consumer protections with little evidence or analysis of theadditional net benefit it brings.
There is evidence of scope for productivity and competition gains from reforming scope of practice inseveral licensed occupations without compromising safety and service quality.

• Funding arrangements for nurse practitioners should be reformed to ensure they are providing services attheir full capabilities. Trialling of pharmacist prescribing should be pursued by all states and territories,
supported by rigorous evaluation and appropriate funding arrangements.
Substantial improvement to licensing policy, and consumer regulation more generally, will require
governments to invest in a coordinated, long-term strategy to ensure licensing is fit-for-purpose in amodern service economy.
• While individual states and territories are responsible for driving this process, it will need to be supported bya national reform agenda with support from the Australian Government.

• Priority should be given to further investment in digital licensing platforms that can underpin a better
regulatory approach to licensing.

59Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

3.1

Licensing and productivity

In the labour market, occupations may be subject to formal licensing, registration, or regulated statutory
minimum requirements (henceforth referred to as ‘licensing’) that act as a signal of proficiency and quality ofwork output to employers and consumers. When working efficiently, licensing helps to:• address externalities such as safety outcomes and the quality of services• decrease information asymmetries between consumers and businesses and/or between employees andemployers• enable targeted interventions for ongoing training and enforcement of compliance and disciplinary measures• raise human capital formation where market signals fail to properly price skills and experience.
At the same time, by restricting the pool of workers who can provide particular services, licensing can limit
entry into a market, restrict choice and increase prices. When licensing restricts entry into a market, it can act
as a barrier to productivity growth that could occur within firms and between firms (Bambalaite, Nicoletti and
von Rueden 2020).
• Within a firm, higher entry requirements can result in lower competition from new market entrants. Thiscan restrict access to skilled professionals, reduce the incentive to innovate and produce an over-relianceon the licence as a signal of quality. Furthermore, within an occupation if a licence is overly rigid in its
regulation of tasks, this may impede on-the-job skill formation.
• Between firms, productivity growth results when highly productive firms have a better ability to attract
skilled workers compared with lower productivity firms. Licensing may act to reduce this reallocation oflabour; particularly where professional skills overlap and further formal training disincentives mobility
among workers. For instance, highly skilled practitioners with many years’ industry and teachingexperience may be valuable to a school but short in supply if these professionals are disincentivised tochange career due to formal re-training requirements that are onerous and costly.
Much of the available evidence supports the idea that licensing stringency reduces market competition(figure 3.1).
While the international evidence on licensing and productivity may be difficult to apply directly to Australia,28
the available evidence shows that the costs of licensing can be significant. A growing body of empiricalliterature generally finds that occupational licensing increases labour market rigidities, and hence likely
decreases productivity, with findings relatively consistent across countries and occupations (box 3.1).
The administrative costs of licensing (e.g. the raising of fee revenue) can also be a significant economic cost— in 2014, total annual licensing fees were over $600 million across the Australian economy.29 Some haveargued that licensing fees are necessary to fund regulatory activities (Senate Red Tape Committee 2018).
From this perspective, licensing acts as an industry levy, and removing this source of revenue would either
reduce the resources available for regulation or shift the costs of regulation to those outside the industry.
However, this is generally not a strong argument to guide the design or use of occupational licensing, given
the economy-wide impacts of licensing policy (both in terms of effectiveness and its costs) would outweighthe fiscal benefit of collecting licensing fees. Indeed, some governments have undertaken to remove fees

28 The international evidence may be of limited applicability to Australia (given the differences in licensing regimes andlabour markets) but some lessons can be drawn from international experiences (given the relatively consistent findings
across countries). A significant amount of research would be needed to better understand the impact of all of Australia’s
licensing regimes, across different occupations and jurisdictions.
29 Estimates in 2014 dollars based on average licensing fees from the Productivity Commission’s Survey of occupationregistration authorities (PC 2015b).This would be the equivalent of roughly $760 million in 2022 dollars.
60

Occupational licensing and registrationfrom some permits in the post-pandemic recovery (such as the ACT’s hawker licence) or remove licensing
requirements altogether (such as for commercial agents in New South Wales).
Figure 3.1 – Stricter licensing requirements are correlated with lower competition
Business churn and licensing stringency in Europe, 2014 – 2016a40
35

Business churn rate

30
25
20
15
10
5
0
0

0.5

1

1.5
2
2.5
3
Occupational Entry Regulation (OER) indicator

3.5

4

4.5

a. Each dot represents one country-sector cell, where sectors correspond to one of the occupations covered by the
Occupational Entry Regulation (OER) indicator (e.g. architectural activities in Spain). The OER indicator measuresdifferent areas of regulation (administrative, qualification and mobility requirements) and different types of regulation(licensing, a situation in which only supervisors require a license, and certification). Business churn is defined as the sumof enterprise births and enterprise deaths divided by the number of active enterprises. The set of countries used includes
Belgium, Finland, France, Germany, Hungary, Italy, Portugal, Slovenia, Spain, Sweden, and the United Kingdom.
Source: Bambalaite, Nicoletti and Rueden (2020).

It is likely that reform to occupational licensing would lead to significant productivity gains. CEDA (2022c) use theOECD’s estimate of productivity gains from reducing occupational licensing stringency to estimate the potential
benefit to Australia. Noting that the restrictiveness of licensing in Queensland is comparable to Germany or
Canada (according to the OECD’s Occupational Entry Regulation indicator), CEDA estimates that reducing
licensing stringency would generate up to $5 billion each year for the Australian economy, assuming similar scopefor gains across all states and territories despite some variation in licensing stringency (p. 9).30
While it is difficult to model the impacts of licensing reform accurately, indicative estimates suggest thatsignificant economy-wide productivity gains could be achieved if labour productivity improved in industries
that use licensing (such as ‘construction’, ‘transport and wholesale’, ‘professional, scientific and technicalservices’, ‘school education’ and ‘health and social services’) (volume 9). However, these estimates should
only be taken as indicative of the potential economic gains, as they do not capture potential impacts onservice quality and safety outcomes.

30 This is not unreasonable given CEDA finds similar levels of licensing restrictiveness in New South Wales, and moststates have/or are implementing similar licensing approaches to the occupations measured by the OER indicator, e.g.
plumbers, nurses, electricians, architects, lawyers and civil engineers.
61Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 3.1 – International evidence on licensing and productivity
Licensing can reduce labour mobility, employment and increase wages of licensees
Johnson and Kleiner (2020) analysed interstate migration of 22 occupations in the United States. They
found that long-distance migration (defined as greater than 50 miles) was 7% lower for individuals instate specific licensed occupations compared with individuals of quasi-national licensed occupations.
Blair and Chung (2019) estimated the effect of licensing on employment in the United States. They
compared employment outcomes for neighbouring counties along state borders, where the occupation
was licensed in one state but unlicensed in the other. They estimated that the presence of occupational
licensing in a county reduced the equilibrium labour supply by an average of 17–27%.
Pizzola and Tabarrok (2017) investigated the wage premium for occupational licensing, looking at thedelicensing of funeral services in Colorado that occurred in 1983. Using a difference-in-difference
methodology and the delicensing event, the authors estimated that licensing requirements for funeralservices created a 11–12% wage premium.
Similar results have been observed in the European Union for wage premia. Koumenta and Pagliero(2019) analyse data from the EU Survey of Regulated Occupations using a cross sectional regression forwages and control for human capital, industry, occupation and country fixed effects. The authors find thaton average having a licence is associated with 4% higher hourly wages.
Licensing is associated with reduced productivity
The OECD (2020) conducted an analysis across US and EU states on the impact to firm-levelproductivity from occupational licensing — or occupational entry regulation (OER) — using an indicatorthat captured administrative burdens, qualification requirements and mobility restrictions. The study
found OER tended to be correlated with less dynamism and lower labour mobility among firms.
Using a model of firm productivity growth based on growth at the productivity frontier and distance of a
firm from that frontier, the study found that significant reform (a 1-point reduction in the OER indicator)
led to a 1.6 percentage point increase in labour productivity of the average firm. Furthermore, they findthis association is stronger for firms closer to the productivity frontier, with the most productive firms
experiencing nearly double the negative impact to labour productivity.
Benefits of licensing are less evident but can be difficult to measure
While the costs of licensing are often easily observable, the benefits are unlikely to translate to aggregate
indicators of output and productivity. However, research in Europe and the United States has failed tofind evidence of improved service quality in a range of industries using more targeted measures ofquality such as medical records, consumer complaints, customer surveys and safety outcomes (Kleinerand Kudrle 2000; Powell and Vorotnikov 2012; Koumenta, Pagliero and Rostam-Afschar 2019; Farronato
et al. 2020) although some evidence shows that licensing healthcare professionals can improveoutcomes (Anderson et al. 2016). Some caution is needed when interpreting these results because thebenefits of licensing are, by their nature, more difficult to estimate than costs. For instance:• Quality can be difficult to accurately measure — Farronato et al (2020) failed to find evidence ofquality implied by consumer reviews and re-use of the service. Some consumer safety or quality
issues that take time to manifest, and the effect of a change in policy may not be captured unlesssufficient time has passed (p. 32).

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Occupational licensing and registration

Box 3.1 – International evidence on licensing and productivity• Where licensing aims to ensure minimum training or expertise, some of the associated benefit may relate
to the more difficult and less common circumstances — hence aiming to avoid incidents of greater severity
and lower likelihood. The change in the rate of such incidents may be difficult to measure.
• Licensing systems can vary greatly across countries, industries and occupations, which means
indicators of licensing and quality may not always be relevant or comparable.
• The use of de-registration, negative licensing, and other restrictions as a means of prohibiting bad
actors from practicing may only capture a small minority of practitioners. As such, its effect may besmall at the aggregate level, and any additional assurance provided to the end-consumer may bedifficult to measure.

Recent licensing reform in Australia
In Australia, about 18% of employed people were in an occupation requiring registration of some kind in2011 (PC 2015b), which is similar to other advanced economies.31 Some occupational licences areassessed by state and territory governments (e.g. construction licences), while others are assessed by anational (e.g. medical licence) or state and territory-based (e.g. legal practising certificates) regulatory board.
While licensing reform is often pursued to expand coverage or increase requirements to better protect quality
and safety, some deregulation has occurred where there are lower risks to the consumer and they are moreeasily alleviated through improvements in the functioning of competitive markets or alternative forms of
consumer regulation (such as through the provision of information).
Between 1996 and 2000, under the National Competition Policy deregulation agenda, Australian
governments either reformed or abolished a number of occupational licences, including for hairdressers,
employment agents, podiatrists, real estate agents, dentists, veterinarians and conveyancing services.
These reforms typically involved removing categories of protected work or reducing the scope of licensed
practice to improve competition and lower prices (PC 2005).
There has been less deregulation activity since the initial wave of National Competition Policy reforms,
although many jurisdictions have continued to implement changes focusing on reducing compliance burdens
associated with licensing (for instance, by redesigning scope of practice or reducing renewal timeframes). In
some cases, deregulation has involved the implementation of a ‘negative licensing’ system, which allows forthe prohibition of businesses or individuals from practice in a particular occupation, but involves no priorapproval nor a formal (positive) licence for practitioners.
In the past decade, state and territory governments have found additional scope to implement negative
licensing. For example:• in 2014, the Queensland Government implemented negative licensing for debt collectors who operate
without face-to-face contact (under the Debt Collectors (Field Agents and Collection Agents) Regulation2014 (Qld))• in 2015, unregistered health practitioners were regulated through a national code of conduct (COAG
Health Council 2015)

31 In 2015, the average share of workers that were licensed across US states was 25% and the average share across

EU countries was 22% (von Rueden and Bambalaite 2020).
63Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report• in 2016, a negative licensing regime came into effect for South Australia’s tattoo industry, with theexpressed aim to ‘ban organised crime gangs and second-hand dealers and pawnbrokers from owning orcontrolling tattoo parlours’ (Government of South Australia 2016, p. 35)• in 2022, New South Wales introduced a negative licensing scheme for those who had no face-to-facecontact with debtors and easing of licensing requirements for field agents.
The NSW Productivity Commission recommended that negative licensing be considered for occupations
where there is low risk of consumer harm (as an alternative to formal licensing but in conjunction with otherconsumer protections) (NSW PC 2021). By contrast, licensing is often appropriate where there are material
risks to public health and safety.
However, risk of consumer harm alone is not necessarily grounds for all forms of positive licensing — theadditional requirements in a licensing scheme must be proportionate to the problem identified and clearly
linked to reductions in consumer harm. Indeed, there are a variety of approaches used across advanced
economies, with different requirements applied to low and high-risk occupations (box 3.2).
Australian jurisdictions also vary in their approaches. In 2008, the Productivity Commission identified nearly
100 occupations requiring licensing and found over 70 were not consistently licensed in all jurisdictions,while only 26 were (PC 2008, p. 489). This inconsistency continues today — for instance car repair
mechanics are only licensed in New South Wales and Western Australia, and there is varied approaches tolicensing motor vehicle salespersons, yard managers and car market operators (DMIRS 2019); likewise, lowrisk building trades such as fencing, plasterers and painters are only licensed in some states and to varying
degrees (NSW PC 2021). Even where states and territories are broadly aligned on the use of an
occupational licence, considerable variation can exist in terms of minimum requirements, regulatory
frameworks, legislative instruments, terminology, and the classes or categories of work that are regulated.
In some cases, the challenge in licensing policy may be less about whether to license at all, but rather how
licences should be designed. In other cases, the extent of safety risk (and the effectiveness of licensing as asolution) may be unclear.

Box 3.2 – Occupational entry regulation indicators
Countries differ in their approach to licensing — there is no consensus on its role among other forms ofregulation, with some countries favouring market mechanisms and self-regulation. Indeed, several formsof regulation would typically be used with regard to safety and quality of services. As such, it is notstraightforward that more stringent licensing would always improve health, safety, or quality outcomes,
particularly if those objectives are already achieved more efficiently by other means.
The OECD’s occupational entry regulation indicator (OER) measures licensing stringency across a rangeof occupations and countries and finds considerable variation in both low-risk occupations such as
hairdressers and even higher risk occupations like electricians. In fact, many European countries havelittle to no requirements for electricians to be licensed. These differences in single occupations often
reflect broader trends in the different approaches countries take in regulating certain sectors. In the
United Kingdom for instance, construction and building trades utilise industry-led certification schemes.
In Sweden, company self-auditing schemes are relied upon, allowing electricians to be covered by acompany’s scheme rather than independently licensed.

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Occupational licensing and registration

Box 3.2 – Occupational entry regulation indicators

3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

British Columbia
New Brunswick
Newfoundland…
Prince Edward…
QuebecSaskatchewan
Switzerland
Spain
FinlandUnited Kingdom
Portugal
SwedenIndia
IsraelSouth Africa
Belgium
Hungary
Slovenia
FrancePolandTexas
Italy
FloridaNew York
California
Pennsylvania
Germany
IcelandAlberta
Austria
Ontario
Nova Scotia
Manitoba

OER

Hairdressers

3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

British Columbia
Newfoundland…
Spain
United Kingdom
SwedenBelgium
Hungary
Slovenia
Italy
Switzerland
IsraelFranceNew York
Finland
PolandGermanySouth Africa
California
India
QuebecIceland
Austria
New Brunswick
Alberta
Manitoba
Nova Scotia
OntarioPrince Edward…
Saskatchewan
Texas
Portugal
FloridaPennsylvania

OER

Electricians

Source: von Rueden and Bambalaite (2020).

The next challenges for licensing policy
Australian governments recently introduced automatic mutual recognition to reduce interstate restrictions
and alleviate rigidities caused by inconsistent licensing systems. However, national efforts to reform licensing
systems themselves have largely failed, with ad-hoc reform driven by states and territories to varying
degrees. A renewed approach to licensing reform is needed to ensure it is guided by the best available
evidence and delivering licensing systems that are fit-for-purpose.
• Licensing has become more stringent in recent years in areas where safety is a concern, but suchdecisions are often informed by limited evidence of safety issues, the efficacy of increased licensing andscant consideration of alternative forms of regulation (section 3.2).
• At the same time, well-known issues regarding scope of practice between licensed occupations remainunresolved. In this context, reforms could reduce barriers to competition without compromising safety andservice quality (and in some cases improving them) (section 3.3).
65Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report• The introduction of digital licensing provides another avenue for consumers to access information about
services beyond that already provided by digital platforms and the internet. Government’s will need toinvestigate these changes and re-evaluate the use of licensing where digital innovations may be providing
better answers. Digital licensing also provides opportunities to improve data sharing for mutual recognition
arrangements, current compliance activity, and analytics to both monitor trends in licensing and assess
the effectiveness of reform (section 3.4).

3.2

Is licensing the best way of improving safety?

A challenge for policymakers is to balance objectives relating to service quality (such as public safety andconsumer welfare) and those relating to competition (such as the creation of barriers to entry). The Harper
review advised that:
Professional and occupational licensing can promote important public policy aims, such as quality,
safety and consumer protection. … Competition considerations should not override theseobjectives — but neither should they be ignored. (Harper et al. 2015, p. 140)
Productivity objectives are not necessarily in conflict with public safety. To the extent that restrictive regulations
reduce the accessibility and quality of services, such restrictions can work against the very objectives licensing
seeks to achieve — the quality and safety of services provided to consumers. Such trade-offs are particularly
evident in sectors where public health and safety outcomes can be negatively influenced by:• both poor quality service delivery and by the lack of access to services themselves• poor incentives to produce high-quality work where consumer choice is constrained.
Governments should not approach licensing reform as a choice between safety and efficiency. Rather, given
the costs associated with licensing have the potential to be substantial, licensing should only be used where
alternative options are unavailable, and its coverage kept to the minimum necessary to achieve its benefit(IPART NSW 2014; PC 2015b).
If safety and other forms of service quality can be achieved or improved with less stringent licensing, thiswould likely result in significant productivity gains. However, determining the appropriateness of licensing
among several regulatory options or pursuing a proportionate approach is often constrained by limited
evidence. This is one reason jurisdictions can vary in licensing requirements.
Indeed, the failure of the National Occupational Licensing Scheme in 2014 was in part due to the inability forjurisdictions to agree on uniform licensing requirements and disagreement about a perceived ‘lowest common
denominator’ approach being taken to nationally consistent requirements (PC 2015b, p. 35; ACCI 2018). For
policy makers to pursue an outcomes-based approach to safety regulation consistently and effectively, improving
current gaps in evidence and understanding of licensing outcomes will need to be prioritised (figure 3.2).

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Occupational licensing and registration

Figure 3.2 – Licensing in an outcomes-based approach to safety regulationa

Step 1: Is licensing
the best response?

Assessmentof licensing
policyAssessmentofalternative
measuresEvidence
neededStep 2: Is licensing
well designed?

• Does the market currently fail to address
consumer risks?
• Are other laws or regulation unable toadequately protect consumers?
• Is licensing an effective and efficientmeans of improving outcomes?

• Is the coverage the minimum necessary?
• Is the duration the maximum possible?
• Are reporting requirements the minimum
necessary?
• Are mandatory attributes the minimum
necessary?

• Consumer information services,
warranties or guarantees.
• Independent certification agencies andreputation.
• Self-regulation through professional
associations.
• Regulation that targets outputs rather
than inputs (e.g. consumer protection
law, mandatory insurance schemes andmandatory certification requirements).

• Reducing licensing to individuals responsiblefor quality control and outputs.
• Replacing qualifications with competency
exams on industry codes and standards.
• Improving consumer choice throughinformation provision (e.g. licensee history,certification report on outputs).
• Non-mandatory professional development,
accreditations and training.
• Regulation that targets outputs rather than
inputs (e.g. negative licensing).

• Are health and safety risks the result ofpractitioner competency?
• Is poor quality work due to lack oftraining, inexperience, or poor
incentives?
• What training, qualification andexperience would exist without
licensing?
• Are other laws and regulations failingand if so, could they be improved?

• Which tasks entail material risks and what
type or level of quality is relevant?
• Do higher entry requirements (e.g. years ofexperience, level of qualification) correlatewith safer outputs?
• Does oversight and quality certification reduce
health and safety risks?
• Are ongoing training requirements leading tobetter quality work, relative to non-mandatory
training measures?

a. Adapted from PwC and IPART’s licensing framework.
Sources: IPART (2014); PwC (2013).

The expanding role of licensing in health and safety regulation
Overall, Australia’s licensing is relatively stringent where safety is concerned (CEDA 2022c). Health and safetyconcerns continue to be cited as the primary justification for licensing by industry and reform has tended to
expand coverage rather than reduce it (Senate Red Tape Committee 2018, p. 12). Justifications for licensing areparticularly strong in the healthcare sector because the potential for consumer detriment from a poor choice issignificant and product information and quality verification are difficult to obtain (PC 2008, p. 93).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

The relationship between licensing and safety outcomes can be less straightforward in other sectors. For
instance, in building and construction, the mix of services involve both high and low risks to health andsafety, and quality is verified at multiple stages of production. In addition, consumers vary in their knowledge
and sophistication — in a large commercial construction project, for instance, there may be less potential for
information asymmetry between subcontractors to contractors than there might be between individual
consumers and service providers.
This can make determining the minimum necessary level of licensing difficult. For instance, a licence tocontract for work can be useful to enforce compliance with building standards. However, it is less clear
whether those carrying out the work should also be licensed if supervision and certification of quality andcompliance are already provided by the contractor and/or licensed supervisor. While the licensing ofpractitioners might ensure a minimum qualification level (increasing the likelihood that standards can bemet), it does little to ensure those practitioners deliver quality work on any given day. It also has the potential
to restrict skill formation, flexibility, and innovation in how a business completes the work.
In the building and construction sector,32 licensing arrangements have become more stringent across mostjurisdictions in the past five years, with either higher entry requirements or more extensive coverage forlicensed work, including:• In Victoria, the ability for plumbers to contract for work will now require additional 2 years of experience on
top of passing a licence exam (DELWP 2018; Victorian Government 2019); Electricians require mandatory
continuous professional development (CPD) and those doing line work now need a separate licence(ESV 2020), new licensing and registration for subcontractors and employees across a range of building
trades (beginning with carpenters in 2023); further licensing reform has been proposed to restrict scope ofpractice for classes of building work and implement new licence categories developed for complex and/or
high-risk work (Victorian Government 2021).
• In New South Wales, new registration requirements and mandatory CPD for Design Practitioners, Building
Practitioners and Professional Engineers working on class 2 buildings (NSW Fair Trading 2023);
introduction of medical gas licences that cover fitters, technicians, and mechanical services workers (NSWFair Trading 2022); proposed expansion of building practitioner licensing to the commercial industry(DCS 2022).
• In Queensland, mechanical service occupational licences covering medical gas and air conditioning andrefrigeration work (DHPW 2019).
• In Western Australia, the introduction of registration for professional and technical building engineers(DMIRS 2022b); proposed additional mandatory training in CPR and low voltage rescue for electricians(DMIRS 2022a); proposed introduction of tiered building licences to limit scope of work to specific buildingclasses and expansion of licensing to remote areas previously exempt (DMIRS 2022c).
• In South Australia, an accredited professionals scheme for planners, building certifiers, land surveyors andother industry professionals involved in making development decisions (DIT 2019).
Strengthening licensing arrangements in building and construction may be justified where the benefits
outweigh the costs and suitable alternatives are not available. In many instances, however, reforms arecharacterised by poor assessment of health and safety risks and inadequate consideration of whether
alternative regulation already addresses the problem — largely as a result of insufficient evidence to inform
policy (discussed below).

32 Building and construction is broadly defined and includes some trade licenses that also operate outside of

construction.
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These characteristics of licensing reform are not unique to building and construction but provide a usefulcase study of the challenges that most licensing regimes face when aiming to protect health and safety.

High risk ratings by default
When determining if licensing is appropriate, the Independent Pricing and Regulatory Tribunal of New South
Wales (IPART) and PwC recommend conducting a simple risk assessment to determine the potential cost or
detriment of the absence government action, and whether this detriment is sufficiently high to warrant licensing.
This assessment depends on both the likelihood of a negative event occurring and the consequences of thatnegative event if it did occur (IPART NSW 2014, p. 45). Where there is limited evidence available to guide theassessment of risk, or it is not possible to accurately estimate the probability of safety risks occurring, it is difficult
to establish the extent to which licensing is appropriate.
Despite this, a risk assessment can still result in a high-risk rating where the probability of the incident cannot
be accurately estimated, and hypothetical or anecdotal evidence is used to suggest the detriment is high. As
noted by the Senate Select Committee on Red Tape (2018), the evidence base provided by industry
participants as part of regulatory assessments is often entirely anecdotal. This typically includes reference tounquantified safety risks or claims of poor practice among competitors. Without quantifiable evidence toevaluate these claims, high-risk ratings become the default position in licensing assessment and typicallyoutweigh consideration of negative impacts on competition and productivity (box 3.3).
In many cases, risk assessments that have been driven by anecdote have either led to more stringent
licensing conditions, or have prevented deregulation. For instance in New South Wales, some building
trades such as painters, plasterers and decorators continue to be licensed despite insufficient evidence ofsignificant risks to safety or financial detriment (IPART NSW 2014; NSW Fair Trading 2018; NSW PC 2021).
High risk ratings can also become the default position where high profile incidents of public safety failure amplify
the downside risks. Once licensing of an occupation has been introduced to protect health and safety it can bedifficult to reverse or relax these requirements, regardless of whether there is evidence that skills andqualifications had been the cause of poor safety outcomes, or that licensing is the most effective solution. As
such, concerns about public safety often lead to pressure to increase the stringency of licensing arrangements —this has been evident in the recent decision to extend mandatory licensing and registration to engineers (box 3.4).

69Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 3.3 – Refrigeration and Air Conditioning licences in Queensland
In 2020, the Queensland government introduced a new mechanical services licensing framework thatcovered new specialist streams in plumbing, refrigeration and air conditioning and medical gas. Twochanges were significant for Refrigeration and Air Conditioning (RAC) work:• the introduction of an occupational licence class for RAC work
• the inclusion of a minimum two-years relevant experience to obtain a contractor licence.
This licensing framework was implemented as an addition to the national refrigerant handling licenceissued by the Australian Refrigeration Council that is required for individuals who install, service or repair
air conditioning equipment. RAC industry bodies argued that current arrangements allowed ‘periphery’trades such as plumbers and electricians to complete similar work in Queensland:
Underestimating the vital importance and safety requirements of a skill based trade licence insteadof a mechanical service licence will undoubtedly determine the HVAC&R industries survival andparity alongside other peripheral trades like plumbers and electricians … since the establishmentof the ARCtick licensing scheme in 2005 to handle refrigerants, this has seen the proliferation oflesser qualifications in a Certificate II training packages for split/systems installers (substandard
courses offered over 1 and 2 days). The substandard courses have resulted in unsafe, inefficient
works carried out by electricians, plumbers’ even gardeners. (TPWC 2018, p. 47)
However, supporting evidence of unsafe outcomes in Australia, let alone Queensland, either does notexist, or is not well founded. Stakeholders gave qualitative evidence on unsafe work practices in relation
to dangerous refrigerants and pointed to one death in India and two deaths in Victoria the cause of which
had yet to be determined, but according to the Australian Refrigeration Association was ‘highly likely … a
result of unlicensed persons working on a non-compliant refrigeration system containing a flammable
refrigerant’ (TPWC 2018, p. 48).
The Queensland government also cited concerns for the potential for legionella bacteria to spread in air
conditioning systems, which can pose significant health risks in hospitals and aged-care facilities(DHPW 2019, p. 4). But no evidence on the incidence of this risk or link with unlicensed workers was
publicly provided and it remains unclear whether licensing would be more effective than other regulatoryintervention, such as testing and treatment activities under health and safety laws.

Box 3.4 – Licensing and registration of engineers
The Opal and Mascot Tower incidents
Over 2018 and 2019, separate incidents of structural cracking were discovered in the Opal and Mascot
Tower’s, leading to evacuation and concern about their potential collapse. Technical reports on the
Mascot Tower were not made public but an independent report commissioned into the Opal tower
incident found causes of the observed damage were largely related to changes made after the original
design and exacerbated by construction issues (Carter, Hoffman and Foster 2019, p. 16).
Regarding certification of the building, the reviewers found no evidence that the building certifiers had
been deficient in regard to statutory expectations but suggested there was evidence that checks for70

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Box 3.4 – Licensing and registration of engineers
compliance were either not taken or taken with insufficient rigour (Carter, Hoffman and Foster 2019,p. 14). It was recommended that review processes be primarily strengthened through:• creation of a registry of engineers• independent third-party certification of engineering designs• regime of critical stage, on-site inspections by an independent registered engineer.
While the review largely focused on certification and approval in the design and construction of buildings,
the incident has been commonly cited as evidence to justify broader mandatory registration of engineersthat most states and territories have now implemented or are in the process of implementing (DISR
2019; DCS 2022; DMIRS 2022b).
Would mandatory registration of engineers have prevented the incidents?
While there is evidence that some designs and workmanship did not meet standards, this was often
nuanced technical failings in conjunction with coordination issues between different practitioner
expertise. The evidence did not establish that practitioners involved in this work had qualifications and/or
experience below minimum requirements that could be attributable to the design and workmanshipfailings. As the reviewers themselves noted:
Australia is also home to some of the world’s best architects, design engineers andconstruction companies who enjoy high international reputations for their work globally,
including the firms associated with the design and construction of the Opal Tower. (Carter,
Hoffman and Foster 2019, p. 14)
Indeed, the firm responsible for the structural design, WSP, is a global professional services firm ofconsiderable reputation, market size and resources. It is doubtful they would employ engineers below
minimum standards in qualifications and experience as set out by mandatory engineering registration.
Previous work by the Productivity Commission into public infrastructure investigated the validity of
mandatory engineering registration in Australia. Similar high-profile engineering failures were mentioned
by stakeholders, yet the evidence suggested these failures involved senior and accredited engineers(PC 2014c, p. 586). Queensland was the only state at the time to have a mandatory registration scheme
in place but there was little evidence it had improved outcomes relative to other jurisdictions. The
Commission concluded that mandatory registration was not justified given a lack of evidence that labour
market mechanisms were failing to ensure a necessary level of quality:
Businesses that hire engineers are able to screen them during the hiring process, and to
dismiss them if they are not proficient. In this sense, the conceptual grounds for mandating
registration do not appear strong. (PC 2014c, p. 587)
There continues to be little evidence that mandatory registration is a necessary or efficient mechanism to
improve engineering services to protect public safety.
Alternative avenues for reform
Subsequent court proceedings between the contractors involved in the work demonstrated critical failings incoordination. It was claimed that Evolution (who designed, manufactured, and installed the precast wall
panels for the building) made changes to the shop drawings that proposed a change to the grouting thatwas subsequently identified as a cause for the structural defects. WSP denied approving these changes,

71Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 3.4 – Licensing and registration of engineers
alleging that Evolution engaged in deceptive or misleading conduct by failing to expressly raise the designchanges with WSP before commencing with the work (Supreme Court of New South Wales 2022).
This appears to reflect a perennial problem faced by many countries in how to effectively manage
complex high-rise residential constructions. International research into the challenges associated withbuilding complex structures have highlighted the challenge of maintaining the ‘golden thread’ of
information. This is where information on the original design intent and subsequent changes arecaptured, maintained, and used to support safety decisions (Oswald et al. 2021). The details of thisincident suggest reform aimed at improving accountability, coordination and information sharing between
contractors is likely to have the greatest impact.

The role of licensing in the context of other safety regulation
In determining the role of licensing, IPART and PwC (2014) recommends policy makers consider all
regulatory and non-regulatory options for achieving the desired objective. Indeed, safety regulation takes
many forms aside from the licensing of practitioners, including product safety under the AustralianConsumer Law, work health and safety law, and industry-specific codes and regulations (such as thenational construction standards under the Building Code of Australia).
Establishing the minimum necessary regulation for a particular objective would ideally involve consideration ofmultiple forms of regulation, including less restrictive mechanisms (such as industry self-regulation) or more
flexible approaches (such as risk-based regulation). Despite this, when health and safety claims lead to a high-risk
rating, other forms of consumer regulation are often pursued as an addition to licensing rather than an alternative.
For instance, recent licensing reform across most states and territories in building and construction have been
driven by growing concern about defects and complaints in the industry, but this has occurred in addition to arange of other regulatory changes, and with little evidence of the benefit of further licensing (box 3.5).
The reform efforts have been led by the Building Minister’s Forum and guided by a report they commissioned into
improving compliance with the National Construction Code (NCC). The report recommended several changes tothe licensing of building practitioners that included an expanded range of licensed categories, additional
competency and qualification requirements and compulsory CPD on the NCC (Shergold and Weir 2018).
These reforms were recommended alongside broader regulatory changes aimed at improving signals of
product quality and enforcing accountability for services provided. The focus on output quality and consumer
choice is a consequence of the performance-based approach of the NCC:
The code sets out explicit objectives, listed as a hierarchy of requirements. It is not intended to be overly
prescriptive. Designers and builders have the capacity to find creative solutions to meet the performancerequirements … This is to be contrasted with traditional prescribed building codes that mandate specificconstruction practices. There are clear economic and aesthetic benefits to a performance-based approach:
new techniques can be introduced to increase productivity; new products and innovative technologies can beapplied to reduce costs or widen choice; and new creative architectural design is encouraged. (Shergold andWeir 2018, p. 9)72

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Box 3.5 – Defects and complaints in the building and construction industry
Efforts to reform the building and construction industry have been underway across most states andterritories due to problems with product quality and public safety. This view has been prompted by highprofile safety failures in multi-storey buildings, the high incidence of defects and complaints from homebuyers, and industry feedback on the systematic failings in the current regulatory environment (Shergold
and Weir 2018). In response, licensing changes have been recommended or implemented within a suiteof regulatory reforms aimed at broadly improving standards in the sector (DISR 2019). However, it isunclear whether further licensing would create additional benefit given the lack of evidence establishing aclear link between quality issues and weak licensing arrangements.
Defects, complaints, and safety failings in multi-story buildings are a common issue internationally,
despite considerable variation in the approach to licensing and registration (The World Bank 2013;
Oswald et al. 2021). As CEDA points out, it is questionable whether further licensing is warranted given
stringent licensing arrangements already in place have failed to stop a range of quality and safety issues
including water ingress, leakage, structural weakness, and non-compliant cladding (CEDA 2022c).
Indeed, mandatory registration of builders has been pursued since the 1960s to deal with building
defects in Australia (Georgiou, Love and Smith 2000). Yet defects have remained a perennial problem
and it remains unclear whether registration has produced benefits — research analysing insurance andpre-purchase inspection data of new homes and apartments in Victoria in the 1980s and 1990s found thenumber of defects were no different between owner-builders and registered builders (Georgiou, Love andSmith 1999; Mills, Love and Williams 2009).
While these findings should not be generalised to all cases of licensing and registration, they emphasise
the importance of establishing the additionality of licensing i.e., the extent to which the introduction of
mandatory entry requirements would lift standards beyond that already provided by the market throughincentives for businesses to hire and train qualified individuals.
There is a stronger case for regulatory reform where intervention improves product information,
processes for accountability and incentives for upskilling. A central concern highlighted by research andindustry consultation has been the privatisation of building surveyors that occurred in the early 1990s.
Private surveyors now service most of the sector but research and consultation has identified concerns
about their independence, poor information sharing (with both consumers and regulators) and aweakened role for government oversight (Senate Economics References Committee 2018; Shergold andWeir 2018; Paton-Cole and Aibinu 2021).
Other issues identified as drivers of poor quality have included:••••

poorly defined accountability and process in the design phasea lack of accountability during the project and once it has been delivered
poor certification, data collection and information sharing
a cultural environment emphasizing low cost/low value work, box ticking, and under investment inskilled labour. (Crommelin et al. 2021).

Some research has found defects are primarily the result of poor workmanship, but this is not necessarilya result of skill levels below a minimum threshold — it is typically linked to issues about accountability,
motivation and communication (Johnston and Reid 2019, p. 11). For instance, Love et al. (2009)
investigated the cause of errors in construction and engineering projects across Melbourne, Perth andSydney and found the majority were intentional violations to increase operational efficiency. Some73

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 3.5 – Defects and complaints in the building and construction industry
international research has argued that while human errors are the immediate cause of defects in thebuilding and construction industry, the originating issue lies in organisational practices:… it would seem that defects are not caused primarily by lack of knowledge in the industry or bylack of education, thereby suggesting that increased efforts in training would not be expected toreduce the incidence of defects … effort is needed to change procedures in project
management, as these are more likely to have greater impact than either further training orchanges in routines on the construction site. (Jingmond and Ågren 2015, pp. 213–214)
Research has also highlighted ongoing issues in available skills in the construction industry, but theevidence has been largely focused on skill shortages as opposed to skill gapsa — where gaps have been
identified, it is often because skills have not kept up with changes in technology and increases in thecomplexity of buildings (PC 2014c; Crommelin et al. 2021; Paton-Cole and Aibinu 2021). Indeed,
licensing is likely to exacerbate skill shortages given the evidence that it can reduce the labour supply
and create significant barriers for new entrants, migrants and those considering career transitions.
a. A skill shortage occurs when the demand for workers for a particular occupation is greater than the supply ofworkers who are qualified, available, and willing to work under existing market conditions. A skill gap refers to asituation where employers are hiring workers whom they consider under-skilled or that their existing workforce isunder-skilled relative to some desired level (PC 2014c).

The inclusion of licensing reform through further prescription of qualification requirements and continuous
professional development appears at odds with the performance-based approach applied to other regulatory
reform. Indeed, there is no reason why a performance-based approach to business practices should not extend
to the supply of labour inputs. This would involve finding opportunities to reduce reliance on prescriptive
licensing arrangements and instead emphasise accountability to standards, access to training andimprovements to market information so that business and individuals can make informed workforce decisions.
Research by Crommelin et al. (2021) investigating construction quality and defects found evidence that alack of accountability and an emphasis on ‘box ticking’ weakened the incentive for practitioners to pursue
higher quality in their work. While licensing may be justified where businesses are poorly placed to meet or
determine standards, a performance-based approach would prioritise regulatory arrangements thatincentivised high quality work while providing flexibility for businesses to achieve this by pursuing their own
workforce solutions and opportunities for skill development.

The evidence on outcomes from licensing
The ability for regulators and policy makers to meaningfully assess the effectiveness of licensing relies onaccess to quality data and evidence. However, regulatory impact statements on licensing reform suggest
regulators are overly reliant on anecdotal evidence and judgement calls on net benefits (box 3.6). While
there are practical limits to more and/or better data, many fundamental questions about licensing are notinvestigated, despite the capacity to do so.
For instance, while it can be difficult to assess trends in safety incidents if they are relatively uncommon;
where incidents are observed, it would be valuable to establish whether they were the result of an
unqualified and inexperienced practitioner. And where skill gaps are observed, some assessment may benecessary to establish whether formal qualifications would be more appropriate than skills and experiencedeveloped on the job — for instance, plumbers appear to be providing some refrigeration and air
conditioning services with no evidence of poorer quality or riskier work provided (box 3.3).
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Without further evidence it is likely that many lower-level tasks could be performed by people in adjacentoccupations without the need for further formal training. There is also an opportunity to better leverage theanalytical potential of licensing systems. The extensive collection of practitioners information, complianceand auditing activities could be better designed and drawn upon to guide future licensing policy decisions.

Box 3.6 – Measuring the benefits in regulatory impact statements
Electrical regulation in Victoria
Energy Safe Victoria made changes to electrical safety regulation and electrical licensing over 2019 and2020. In both Regulatory Impact Statements (RISs) provided, electrical fatality data was used to argue
that the benefits in saving 2-3 lives per year (quantified by the statistical value of a life) outweighed thecosts of the proposed regulation. In isolation, this may be achievable for each set of regulatory reforms,
given that fatalities from electrical accidents have averaged 2.75 a year since 2003-04 in Victoria.
However, both assessments used the same data and methods, implying a combined benefit of roughly
50 additional lives saved from electrocution over a 10-year period. Even if one assumes a perfect causal
link between electrical regulation and reduced electrical fatalities, this additional benefit is impossible toestablish given only 32 fatalities occurred over the decade to 2018-19 and there is no clear trend inannual fatalities over the total 16-year period of available data.
Refrigeration and Air Conditioning licences in Queensland
The RIS provided by the Queensland government on new refrigeration and air conditioning licences(box 3.3) pointed to a range of potential benefits, such as a reduction in safety risks, reduction ofcompetition for licensed businesses, and long-term productivity gains from human capital formation.
None of these benefits were quantified, but it was assumed they would be larger than the estimated $21
million it would cost if three quarters of unlicensed workers undertook training to become licensed in RAC
and the further $1 million from licensing fees (DHPW 2019, p. 35).
Building practitioner registration in Victoria
The Department of Environment, Land, Water and Planning conducted a RIS of building practitioner
registration in 2017. Through cost-benefit analysis they identified total costs of about $27 million per year
for current regulations. While they acknowledged in theory the potential for competition effects and areduction in employment and output, a lack of data stopped them from quantifying this effect. Despite
further difficulties quantifying benefits from builder registration due to data limitations andacknowledgement that registration requirements would not be the primary instrument to ensure quality inbuilding construction — they nonetheless determined that the regulation was producing a net benefit:
Despite the lack of evidence about the reasons for incidents, and the potential link between
these and the specific qualification requirements in the Regulations, the department is satisfied
that this break-even point is achievable given the analysis of the extent of the problem detailed
above and that this option therefore will result in an overall net benefit. (DELWP, p. 23)75

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Finding 7.3
Increased licensing is often based on poor evidence of safety risks
Licensing plays an important role in safeguarding standards of quality, particularly for both consumer
protection and public health and safety grounds. However, it is not always the case that more stringent
licensing is more effective, and in some cases, there is relatively poor evidence that the extent of licensing
reduces health and safety risks. Policy advice has repeatedly emphasised proportionate andevidence-based approach to licensing, however this can be difficult to implement where data are lacking.
In the building and construction industry, licensing has been increasingly focused on protecting health andsafety despite little evidence of its effectiveness. The lack of empirical evidence supporting licensing
design has led to a ramping up of licensing stringency that has increased barriers to entry and is likely
leading to considerable inefficiencies in the provision of skills and reduced productivity in the sector.
Priority needs to be given to understanding health and safety outcomes from licensing, including but notlimited to:• the extent that market mechanisms are failing to ensure adequate levels of skill or experience that arenecessary to protect health and safety• the extent that health and safety failings correlate with deficiencies in qualifications, training andexperience; as well as qualitative investigation of what drives poor quality work and safety failings• the additional benefit of licensing where consumer regulation already exists to improve accountability to
the quality of outputs (i.e. certification, standards and codes of practice).

3.3

Addressing boundary issues and scope of practiceIn occupations where licensing plays a necessary and important role, further challenges relate to designing
the scope of occupational licences and the boundaries between different occupations (so-called ‘scope ofpractice’ issues). In determining which activities will be covered by a licence, the challenge is to ensure
quality and safety in certain types of work without introducing undue barriers.
While occupational licences may have been well designed at their inception, they may require updating totake account of changes in technology, skills and work practices in the occupation.

Efficient boundaries for licences
Designing efficient boundaries in scope of practice involves a trade-off. For instance, if a particular licence isrequired to perform certain tasks, and the entry requirements are set high, this can ensure that a relatively
high level of skill or knowledge is applied to those tasks. However, this also runs the risk of restricting service
provision in cases where people with other licences or qualifications could safely provide some of theservices covered by a licence.
Getting this balance right can be even more challenging when labour market needs differ geographically. For
instance, New South Wales previously required car mechanics to hold a general motor vehicle repair licencethat covered all types of work. This meant relatively straightforward work, such as wheel alignments, could only
be done by a fully qualified mechanic, which added further pressure to regional skill shortages. Recent changes
by NSW Fair Trading reformed the licence to include a range of trades certificates for individual classes of work
(DFSI 2018). Changes to classes of repair work have also been made in Western Australia (DMIRS 2021a).

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Providing a range of licence categories to correspond with specific tasks and skill levels can reduce thebarriers to entry created by licensing. But this approach may also disincentivise workers to provide a broader
range of services and can add significant administrative costs both for the worker and regulator where
additional licences are sought. In Victoria, plumbers must apply for separate classes of licence for
Stormwater roof plumbing and sanitary plumbing, which is not the case in other jurisdictions.
Little is known empirically about how this design challenge impacts labour market outcomes between
jurisdictions. Either way, maintaining equivalence between regulated tasks and work practices creates anongoing challenge for policymakers. In Victoria, metal roofing work can only be undertaken by a registered or
licensed stormwater roof plumber — builders specialising in roof tiling could be technically capable ofundertaking similar tasks but are not authorised to do so. While options to adjust scope of practice for metalroofing were considered by the regulator, a lack of data or evidence on non-compliance among builders
completing roofing work stopped substantial reform being pursued (DELWP 2018, p. x).

Scope of practice in healthIn the pursuit of high-quality care for all Australians, licensing of healthcare professionals involves a uniquetrade-off between standards of care and access to care.
• Licensing is highly desirable in pursuing standards of care because consumers have difficulty establishingthe quality of medical services before and even after the event, and there are potentially severe
consequences of poor services (PC 2008, p. 93). Furthermore, market incentives and signals of quality
are a poor alternative to licensing when health services are publicly funded.
• However, unlike safety concerns in the purchase of a new home, protection of public health is also
compromised without timely access to care. For instance, regional and remote Australians face barriers toaccessible healthcare, in part due to workforce shortages of health professionals. In this way, the barriers toentry remain an important cost associated with extensive licensing of health professionals. This includes thechallenges of attracting and recognising international health practitioners (discussed in chapter 2).
Health outcomes should be the primary focus of licensing in health, and to achieve this in the context ofconstrained supply of skilled labour, health professionals should be practising at their full scope according totheir skills and experience. However, in practice, rapid changes to technology, skills and patient needs makeit a challenge for regulation to keep pace.
The National Accreditation and Registration Scheme (NRAS) was designed to balance these priorities(box 3.7), but challenges have persisted in coordinated reform and responsiveness to workforce needs(Snowball 2014). Ensuring health professionals can optimally use their skills and knowledge is a perennial
issue. In some cases, licensed highly-skilled practitioners have sole responsibility for performing tasks that
could safely be delegated to other highly-skilled professionals under a different licence (for instance a nurse
practitioner providing diagnosis and prescribing services traditionally done by a GP). This is particularly truein primary health where evidence suggests the most gains can be made by improving the distribution andprovision of services, rather than funding a larger supply of medical practitioners (PC 2015a; DoH 2021;
Breadon and Romanes 2022).
The COVID-19 pandemic has brought this challenge into sharp focus, with added pressure on regional andremote healthcare access, a sharp rise in GP waiting times indicating supply constraints and changing
demand in services towards telehealth, mental health services, complex needs and long-covid. Both inAustralia and internationally, the medical response to the pandemic (including vaccine rollouts) demanded
flexibility in the workforce, ensuring practitioners were operating at their full capacity.

77Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Past work on the healthcare workforce has identified a range of allied healthcare professionals that could bedoing more through expanded scope of practice (PC 2015a). More recently, Grattan has argued for alonger-term plan to restructure the workforce according to a new model of care that prioritises a team based
approach (Breadon and Romanes 2022). While larger scale reform may be warranted, more immediate
improvements to the accessibility of quality care could be pursued through better utilisation of nurse
practitioners and pharmacists.

Box 3.7 – How the NRAS regulates scope of practice
The NRAS was established in 2010 and attempts to strike a balance between flexibility and standards ofcare in governing scope of practice. The scheme created a national law that would be administered by
the Australian Health Practitioner Regulation Agency (AHPRA) but enacted by the states to allow
potential variations in regulation. This has ensured a base line of consistency in the regulation ofhealthcare professionals while providing some flexibility for states — for example mandatory reporting ofpractitioners in Western Australia and Queensland (Bennett et al. 2018, p. 169).
In setting scope of practice this flexibility also extends to individual health providers. The National
Registration and Accreditation Scheme regulates the legal use of occupation titles and broad boundaries
for scope (which states have some control to alter in practice), but individual health providers are
responsible for setting scope of practice at the organisation and individual level (within the boundaries that
AHPRA set) (ACSQHC 2015, p. 5). However, AHPRA and the professional boards retain some control overthis process by settings standards of practice and a governance process that providers must follow inmanaging scope of practice.

Expanding scope of practice for Nurse Practitioners
Nurses with advanced skills and training are often capable of taking on work traditionally done by medical
practitioners and other tasks beyond the scope of a registered nurse. There are many state and organisation levelversions of advanced nurse practice, but the Nurse Practitioner (NP) is the only legally protected advanced
practice title authorised through the NRAS (Chief Nursing and Midwifery Officers Australia 2020). Endorsement as
an NP requires 5000 hours (equivalent to 3 years) full-time experience in advanced nursing practice andcompletion of a masters with a clinical speciality. The scope of practice extends beyond the Registered Nurse roleenabling NPs to conduct advanced health assessments and diagnoses, order and interpret diagnostic tests,prescribe some medications, and refer patients to other health care providers (Smith et al. 2019).
Research internationally and in Australia has investigated the outcomes of NP care and episodes of further
scope of practice expansion. Compared with medical doctors, NPs are found to provide similar levels of careor better, with no evidence of poorer health outcomes (Stanik-Hutt et al. 2013; Petek and Thomas 2021).
Furthermore, NPs can increase access to care, and reduce overall cost (Jennings et al. 2015;
Martin-Misener et al. 2015, Smith 2022).
Beyond substitution for similar work, NPs can also effectively provide primary healthcare in identified service
gaps, such as primary care in regional and remote areas, aged care and mental health (Clark et al. 2013;
Xue et al. 2016; Alexander and Schnell 2019). Indeed, NPs are well positioned to play a stronger role in thedelivery of regional and remote healthcare services given the significant contribution nurses and midwives
already provide (figure 3.3). In remote areas of Australia, NPs are often the only health professional available(Department of Health 2021, p. 8)78

Occupational licensing and registration

Figure 3.3 – Nurses, midwives and nurse practitioners play a leading role in regionaland remote healthcarea
b. Nurse Practitioner services and benefits by region

12

1400

dollars per 1000 people

1600

Workers per 1000 people

14

10

8
6
4
2

60
50

1200
40

1000
800

30

600

20

400
10

200
0

0
Major
citiesInner
Outer RemoteVeryregional regional
RemoteNurses and Midwives

Number per 1000 people

a. Number of primary care workers by region0
Major
citiesMedical Practitioners

Innerregional

Outer
Remoteregional (incl. very
remote)Medicare benefits
Servicesa. AIHW analysis of Department of Health, MBS claims data; and ABS, ERP.
Sources: AIHW (2021, 2022).

Despite the considerable benefits documented in NP roles, they remain underutilised in Australia. NPs makeup only 0.7% of the registered nursing workforce, with only 1 NP for every 100 doctors (compared with 16 forevery 100 doctors in the United States) (Maier et al. 2016; NMBA 2022). This likely reflects the ongoingbarriers faced by NPs in properly utilising their skills and broader recognition and acceptance in their role.
While the national law broadly recognises the NP role and its potential to provide advanced services indiagnosis and prescribing, scope of practice remains restricted by two major funding issues:• the limited number and value of Medicare Benefits Schedule (MBS) and Pharmaceutical Benefits
Schedule (PBS) items NPs have access to that reduce the quality and continuity of care NPs can provide• mandatory collaborative arrangements that require a doctors sign off on an NPs work to access Medicare
billing for services.

Limited access to MBS and PBS
Since 2010 NPs have been given access to some MBS and PBS items to conduct consultations and delivercertain prescriptions. Despite this, the limited nature of access continues to be reported as a major barrier toeffective primary care.
Although eligibility for the MBS and PBS appears to have enabled the development of privately
practicing NP services, research suggests that the current structure of the MBS and PBS does notenable all privately practicing NPs to provide complete episodes of care and there is a challenge
in maintaining a viable business model using only the MBS rebate. To overcome this, NPs may
privately bill, which can lead to increased costs to consumers choosing to see an NP as theirhealthcare provider. (Department of Health 2021, p. 10)
In the Medicare benefits schedule review conducted over 2016 to 2020, expansion of NP funding through the
MBS was proposed but ultimately rejected predominantly due to ‘the lack of clarity regarding nurse practitioner
scope of practice’ (DOHA 2020, p. 1). It was therefore recommended that Nurse Practitioner’s establish a scope79

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportof practice and credentialing framework, potentially guided by the Nurses and Midwifery Board of Australia(NMBA), and investigate alternative funding models outside of the MBS that would be more appropriate.
‘Credentialing’ is an extra step in verifying the appropriateness of a practitioner beyond registration andendorsement, which establishes clinical privilege to engage in specific advanced practice establishedthrough a scope of practice. The Australian Commission on Safety and Quality in Health Care advises thatformal credentialing is required where health practitioners are undertaking unsupervised practice, such as
doctors, NPs, midwives and allied health professionals (ACSQHC 2015, p. 5). For instance, most states andterritories have implemented credentialing frameworks for senior doctors that are particular to their own
healthcare context (ACSQHC 2015, pp. 34–35). In some cases credentialing is used to promote quality
standards, such as credentialing requirements for GPs to claim MBS services for mental health items(Department of Health 2021).
Quality standards for practicing NPs are regulated by the NMBA professional practice framework, which
covers such things as standards for practice, code of conduct and ethics, decision-making framework, safety
and quality guidelines, CPD and recency of practice. To the extent that further credentialing guidance isnecessary to ensure standards of care are upheld for NPs working autonomously in primary care settings,
states and organisations should implement credentialing policy that is suitable to each jurisdictions context.
However, autonomous practice is already undertaken by NPs in private practice settings (albeit with more
restricted funding arrangements) and proposed expansion of funding for NPs has largely related to existing
services within current scope of practice (Nurse Practitioner Reference Group 2019).
In practice, the NRAS and NMBA define the outer limits of practice, based upon the full competency of anendorsed NP and credentialing is independent of this. As such, it is not clear that the development ofcredentialing policies should be prerequisite for funding reform for NPs. If it is to be treated as a prerequisite,
its progress should be prioritised. To the extent that the expansion of MBS eligibility is held up by theprocess of developing a national credentialling framework or other governance arrangements, this will delay
improvements in patients’ access to quality health care.

Mandatory collaborative arrangements
A related issue in the funding constraints imposed on NPs relate to mandatory collaborative arrangements.
This refers to the legal requirement that NPs establish a collaborative arrangement with a medical
practitioner (MP) or entity that employs MPs, in order to access MBS and PBS.
This arrangement can create inefficient and costly delivery of care where patients must pay out of pocket for
simple procedures or wait to be signed off by a medical practitioner to access Medicare rebates. Researchon collaborative arrangements has shown they may limit healthcare provision in regional and remote areas,
create barriers in continuity of care and impose unnecessary legal requirements where collaboration alreadyoccurs (Schadewaldt et al. 2016; Currie, Chiarella and Buckley 2017, p. 538). Mandated collaboration canalso exacerbate underutilisation of NP services because unclear legal liability creates perceived risks for
medical practitioners to sign off on these arrangements (Ervin et al. 2019; Chiarella, Currie and Wand 2020).
In the United States, NPs in just over half the states in the United States are subject similar mandated
supervision or contractual arrangements with a physician. Koch and Petek (2021) analysed many of therecent changes in state law that expanded NPs scope of practice by removing these arrangements andfound no evidence that it harmed patients and some limited evidence that it provided health benefits.
The Australian Medical Association stated that if collaborative arrangements were removed:
There is a real risk that a patient’s usual doctor can be excluded from decisions about a patient’s
care or decisions are made in the absence of all necessary information. Where care becomes80

Occupational licensing and registration

fragmented in this way, it increases the risk of poor patient outcomes due to misdiagnosis andmissed diagnosis, delayed medical intervention and treatment, and adverse outcomes from theinteraction of different medications and treatments. (Australian Medical Association 2021, p. 4)
At the same time, the principle of mandatory collaborative arrangements appears at odds with the original
principle of the NRAS. States, organisations and individual practitioners are expected to uphold standards ofcare, while being entrusted with the flexibility to deliver health services in a manner that is responsive toindividual context and capacity. Legally mandating collaboration to enforce continuity of care is inconsistent
with this approach and there is little evidence it is having the desired effect of genuinely incentivising
teamwork, information sharing and continuity of care.

Recommendation 7.9
Address known issues in scope of practiceAustralian governments should work with the relevant regulators to re-examine boundary issues relating to
occupational licences. In particular, where independent reviews have already highlighted problems or
potential gains to service quality, safety, and productivity, governments and regulators should develop
plans to implement those changes.
As an example, the Australian Government should work with the Australian Health Practitioner Regulation
Agency to expand Medicare Benefits Schedule and Pharmaceutical Benefits Scheme items to nurse
practitioner services that currently receive inadequate funding. Consideration should be given to amending
requirements for collaborative arrangements and to credentialing policy, given their importance to theemployment of Nurse Practitioners.

Expanding scope of practice for pharmacists
In Australia, only 19% (23 million visits) of all GP visits were considered less complex in 2011-2012 (Duckett
and Breadon 2013, p. 21). A low complexity case involves only one problem that can be treated with one or
two medications and requires no referral or further investigation. Many countries, including Australia, haverecognised the opportunities in expanding scope of pharmacists practice to take on some of these cases,
with several regulatory options available to expand scope of pharmacy prescribing in a way that balances
access and quality of care (box 3.8).
One successful example of this has been the expansion of immunisation services provided by pharmacists. This
expansion in scope has allowed community pharmacies — in addition to GPs — to begin administering vaccines
over the last decade. From 2017 to 2019, the initial period in which pharmacy prescribing was introduced
nationwide, pharmacy vaccinations grew from 0.1% of all vaccinations reported to 2.7%. The rate of pharmacy
vaccinations has been highest for older Australians and those living in regional areas (Vette et al. 2020).

81Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 3.8 – Expanding prescribing rights for pharmacists
Currently, pharmacists are trained and authorised to diagnose common medical conditions and supply
low-risk medications for pharmacy only (schedule 2) and pharmacist only (schedule 3) medications.
Expansion of pharmacist prescribing rights can occur where states authorise restricted access toprescription only medicines (schedule 4).
The Pharmacy Board of Australia has identified three models of non-medical prescribing that theAustralian, state and territory governments can pursue to expand prescribing practice for pharmacists:• prescribing via a structured prescribing arrangement (sometimes described as prescribing according
to a protocol)• prescribing under supervision (within a documented collaborative arrangement for example, betweena pharmacist and the patient’s GP)• autonomous prescribing.
States and territories have adopted pharmacist vaccination via structured arrangements. This involved
amendment to various state medicine and poison legislation to authorise limited prescription of certain
medicines according to a protocol (following training and procedures set out in policy).
The detail of these amendments has varied in each jurisdiction according to the vaccinations permitted,
age requirements, reporting and information sharing requirements, registration requirements forpharmacies and pharmacists and availability of funding through the National Immunisation Program. All
states and territories provide some form of vaccination access through pharmacies for influenza, tetanus
and measles, while access to vaccinations for other conditions, such as HPV and Hepatitis, is only
provided in some jurisdictions.
While states and territories can pursue their own scope of practice reforms via structured or collaborative
arrangements, autonomous prescribing would require registration and endorsement via changes to thenational law. Before this change in national law could occur, the Pharmacy Board of Australia would
need to develop accreditation standards for pharmacist prescribing education programs. The Pharmacy
Board of Australia has indicated they will develop accreditation standards for completion by 2023 tosupport any future efforts at autonomous prescribing by states and territories — if current trials ofpharmacy prescribing prove to be safe and effective.
Sources: Pharmacy Board (2022); NCIRS (2022).

This has also enabled the inclusion of pharmacy vaccination in the COVID-19 vaccine national rollout
strategy and its implementation was subsequently brought forward to assist with roll-out in regional andremote areas (Morrison 2022). As of January 2023, pharmacy providers have accounted for 14% of total
COVID-19 vaccine doses administered since the pandemic began (figure 3.4) (DHAC 2023).

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Occupational licensing and registration

Figure 3.4 – Pharmacy vaccinations played a substantial role during COVID-19
Cumulative doses administered by channel
70

Doses administered (millions)

60
50
40
30
20
10
0

Jurisdictions

GP

Pharamacy

Other Commonwealtha. Data from the Australian Immunisation Register, as at 18 January 2023.
Source: Department of Health and Aged Care (2023).

Trialling pharmacy prescribing for low-risk conditions
With the successful expansion of pharmacy-administered vaccination, trials have begun in some states forprescribing medicines for low-risk emergency and repeat prescriptions. This began with Queensland trialling
community pharmacy management of urinary tract infections (UTIs). Evaluation of the program found bothpatients and pharmacists reported significant value from the service because of improved accessibility andconvenience. There were no indications that quality of care had been compromised and pharmacists were
found to comply with treatment protocols (Nissen, Lau and Spinks 2022).
While these results are promising, more trialling and empirical investigation will be needed before
generalised conclusions can be made to guide future policy. Some issues in the collection of data were also
noteworthy and should be rectified in future trials.33
Further reform and trialling of expanded scope of practice for pharmacists will soon commence inQueensland and New South Wales (and potentially in Victoria), with the aim of expanding the types ofvaccines a pharmacist can administer and prescribe for many low-risk conditions. In North Queensland,
trialling will also expand scope to include the provision of health and wellbeing services and prescribing
medicines as part of chronic disease management programs (Queensland Health 2022).

33 Outcomes for more than 4000 of those who participated in the trial were not followed up, with the reason for the failure

to follow up unknown in almost two thirds of cases. Effort was made to prompt pharmacist to follow up patients, but it
remains possible that a lack of reporting and ineffective or inappropriate treatment could be correlated and bias theresults. Future reporting should ensure data collection methods are independent of trial subjects.
83Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

The North Queensland trial has faced some challenges with disagreement over the safety and integrity of thetrial amongst major stakeholders, including peak medical bodies that represent doctors and pharmacists
respectively (Toomey, Burns and King 2022). These disagreements should not be used to scuttle further
experimentation with reform, but rather they highlight the importance of constructing well-designed trials that
produce an evidence base for rigorous, independent evaluation of the outcomes.
Funding coverage through MBS and PBS should also be considered, given access to affordable healthcare is a
primary motivation for the trials. At the time of writing, the proposed trials in North Queensland will not be eligible
for PBS and MBS coverage, requiring patients to cover the costs out-of-pocket (Queensland Health 2022).
However, despite out-of-pocket fees charged in the Queensland UTI trial, participants reported high levels ofsatisfaction in the service attributable to convenience, and pharmacists reported that UTI services werepredominantly provided on weekdays and during working hours (Nissen, Lau and Spinks 2022, p. 50). In thisinstance, differences in service cost were likely offset by the relative cost saving to the individual fromconvenience in the access to UTI services that would not have been possible through a GP appointment booking.
It is uncertain whether the cost saving from convenience would outweigh fees for more expensive services
that are being proposed in Queensland and New South Wales. Furthermore, cost saving from convenienceshould not be prioritised if the aim is to improve access to healthcare — either for disadvantaged groups, orin areas where other services are unavailable. Funding arrangements under MBS and PBS should follow
consistent principles regardless of the practitioners delivering subsidised services.

Will pharmacy-based prescription lead to over-medication?
Two key concerns have been raised about pharmacy-based prescription. First, there is a question of how
well prepared pharmacists might be to take on the additional task of prescription. If changes to scope ofpractice are to improve access to quality care, it would have to involve an adequate standard of diagnosis,
prescribing, and deprescribing. As such, it seems appropriate that recent trials focused on low-risk andrepeat prescriptions and included sufficient safeguards and additional training.
Second, there is a potential for conflict-of-interest in community pharmacies, because funding primarily
comes through medication mark-ups and dispensing fees (Duckett and Breadon 2013, p. 29). There areconcerns this could produce moral hazard through the financial incentive to over medicate, which could also
exacerbate current issues in antibacterial resistance (Nissen et al 2010, p. 31).
International evidence does not support this view, with research largely showing prescribing pharmacists in arange of settings provide comparable healthcare outcomes to usual medical prescribers (Weeks et al. 2016).
Furthermore, some evidence suggests prescribing pharmacists can play a role in the withdrawal of inappropriate
medication (Bužančić et al. 2022). In Canada, a trial of pharmacist prescription for UTI medication foundpharmacists were consistent with guidelines and also optimised antibacterial therapy prescribed by a physician
that was found to be inconsistent with guidelines (Beahm, Smyth and Tsuyuki 2021).
In Australia, antimicrobial resistance has emerged despite prescribing arrangements largely restricted to
medical practitioners. While policy must not accelerate this trend, Australia’s national strategy in combatting
antimicrobial resistance has identified pharmacists as key players in antimicrobial stewardship interventions
and community pharmacists have been identified as important educators on appropriate use of
antimicrobials (ACSQHC 2018, p. 257). If properly implemented, stronger involvement of pharmacists inprescribing could create opportunities to develop better prescribing behaviours in healthcare.
Developing prescribing models that are appropriate to the practice setting will also reduce the risk ofover-prescribing. For instance, it may be more appropriate to implement structured arrangements incommunity pharmacies and autonomous prescribing in larger hospitals where a pharmacist’s scope ofpractice would be defined by the guidelines and practices of the hospital (Duckett 2019). Either way, where84Occupational licensing and registration

independent prescribing is pursued, typical protections through standards, codes of conduct andcredentialing will be essential. Ensuring there is a separation between prescribing and the supply of
medicine will also be necessary to manage conflicts of interest (Pharmacy Board of Australia 2019).
Because independent prescribing is a relatively new development in many countries, it will be important toprioritise data collection and evaluation of prescribing behaviour — particularly in the monitoring ofover-prescription relative to current medical practitioner levels.

Recommendation 7.10
Pursue trials into expanded scope of practiceState and Territory Governments should undertake trials for expanded scope of practice in health services
where supported by evidence. Where service funding is determined by an intergovernmental agreement(between state and federal levels) the Australian Government should allow the appropriate funding
arrangements to encourage the use of evidence-based trials.
As an example, State and Territory Governments should undertake similar trials as those run in
New South Wales and Queensland with regard to the prescription scope of pharmacists’ providing
vaccinations and low-risk medications. The Australian Government should ensure that the novel
arrangements that are the subject of these trials are given equivalent funding through the Medicare
Benefits Schedule or the Pharmaceutical Benefits Scheme, where the benefits are substantiated.

3.4

Laying the foundations for better occupational
licensing design

The 2018 Senate inquiry into occupational licensing in Australia found that the current state and territory led
licensing system in Australia remains complex, duplicative, inconsistent and burdensome (Senate Red Tape
Committee 2018, p. 17). Without clear evidence on the benefits of licensing in Australia, this is likely causingneedless restriction to skills and reductions in productivity.
The Senate Committee acknowledged that a previous attempt at a national licensing system had failed
because of concerns regarding the complexity and costs of the reform (PC 2015b, p. 35). Nevertheless, they
recommended a renewed approach to reform amongst states and territories, with a focus on measurable
outcomes (rather than the mechanism of achievement); the identification of best practice models foroccupations; research into the health and safety benefits of occupational licensing; and expansion of
automatic mutual recognition (Senate Red Tape Committee 2018, p. 18).
Since then, states and territories has successfully implemented automatic mutual recognition with the aim of
improving interstate mobility. Other reforms recommended by the Senate Committee that would improve
licensing schemes within jurisdictions have not been pursued. Prioritising these reforms has the potential tosubstantially improve productivity in services (section 3.1), but this will require a concrete plan for reform withclearer responsibilities between the Australian, state and territory governments, as well as better investment
in data collection and a research agenda to build the evidence base on licensing outcomes.

85Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

A better approach to licensing reform
Implementing licensing reform is more complex when it involves multiple agencies. While it has been
recommended that licensing reform be conducted by an independent body rather than the regulator toensure no conflict of interest (PC 2011b) — in practice this has proved difficult. Previous work has foundnearly 80% of occupation-registration authorities engage in regulation review (PC 2015b, p. 269).
Part of the challenge is appropriate resourcing and review scope. For instance, assessment of alternative
consumer regulation to licensing would often involve consideration of policy changes outside the legislation alicensing agency is responsible for. Streamlining licensing arrangements into a central consumer service agency
is one way states and territories can achieve better utilisation of resources and broader focus on licensing policy,
but this is not always possible depending upon legislative requirements underpinning licensing schemes.
Industry-focused reform can also be useful. In building and construction for instance, national coordination
exists through the Australian Building Codes Board and Building Ministers Meeting, which provides researchand regulatory guidance. Recent efforts to improve compliance with the National Construction Codeconsistently across jurisdictions have been successful (DISR 2019). Despite this, assessment of licensing
arrangements could have benefitted from broader guidance on best practice models and data on current
licensing outcomes to clarify the role it plays in conjunction with other forms of regulation.
States and territories will need to prioritise broader reform agendas — this could usefully be supported byclearer responsibilities for licensing reform between the different levels of government and a stronger
supporting role played by the Australian Government. One possibility would be to designate a central body thatwould be responsible for broader oversight and a national reform agenda. This body would not be responsiblefor implementing a nationally mandated scheme, but rather provide support and guidance on best practice tolicensing and work towards national consistency where it is feasible. This body would also be responsible fordeveloping a central database and research agenda on licensing in Australia (discussed below).
In the 25 years since the National Competition Policy review, the service economy has evolved rapidly —digital technologies provide new sources of market information and new products are changing the nature ofhealth and safety risks. A renewed national effort at licensing reform will be needed to meet thesechallenges. The OECD argued that in light of these changes, consumer regulation should shift its focus from
regulating inputs (e.g. entry requirements through licensing) to regulating outputs (e.g. negative licensing,certification, etc), because transaction costs have been reduced and information about quality is moreaccessible to consumers (Bambalaite, Nicoletti and von Rueden 2020, p. 12).
Exploring these options will require coordination among states and territories to consider the appropriateness oflicensing arrangements and alternatives that may be available. There is a need to build a better foundation ofevidence and cohesive policy advice to define what the limiting principles of licensing are and promote greater
regulatory experimentation and evidence gathering where uncertainty remains. Laying this foundation will help toensure that consumer protection regulation remains effective in the future while promoting productivity.

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Occupational licensing and registration

Recommendation 7.11
Improved process for regular review of licensing policy
Australian governments should conduct regular, independent review of occupational licensing systems in theirjurisdictions, aiming to improve efficiency without compromising safety outcomes, considering efficient scope ofpractice as well as the optimal mix of licensing and other forms of safety regulation. Individual jurisdictions
should drive the process, sharing the findings and conclusions publicly such that other jurisdictions may benefit.
In some cases, the process of review and reform could usefully be driven by the coordinated efforts of all
Australian governments, including through regular meetings at the ministerial level.

Digital licensing and data collection
Digital licensing provides opportunities to reduce administrative burden for business and individuals while
improving information asymmetries faced by consumers. It can also lay the foundation for a national
licensing database and potential for further matching across other administrative data sources. This would
improve data sharing for mutual recognition arrangements, current compliance activity, and analytics to bothmonitor trends in licensing and assess the effectiveness of reform. Stronger emphasis on monitoring (i.e.
collecting and publishing data) and evaluation would go a long way to produce a better understanding of thecosts and benefits of licensing schemes.
New South Wales, Victoria and South Australia have implemented digital solutions for some occupations andsimilar plans are underway in Western Australia (DMIRS 2021b). If these separate digital platforms were toeventually integrate — either through shared IT resources or API connections — this would create theopportunity for a ‘single practitioner view’ across jurisdictions (discussed below).
A national approach to digital licensing does not necessarily require the immediate pursuit of a single, unified
platform across states and territories. This would be costly given the complexity of the regulatoryenvironment and diverse IT solutions underpinning it — in New South Wales alone, 90 agencies wereidentified in an IPART survey as agencies that administer licences (IPART NSW 2014, p. 29).34 Even where
agencies share a licensing function, considerable variation can exist in the policy area and functions of theagency. However, there would be substantial benefits to improving information sharing across governments
and businesses, and establishing a better repository of data on licensing to inform policy decisions. States
and territories should coordinate to ensure digital licensing systems have future integration in mind.
The administrative challenges of automatic mutual recognition (AMR) provide one example where acoordinated digital solution has been beneficial. Poor information sharing systems have been one reason
why many occupations have been exempted from AMR, as the lack of immediate information on apractitioner has been seen as too risky for some regulators. For instance, teachers are currently exempt from
AMR across all states and territories due to concern that teachers found to pose a safety risk to children in
one jurisdiction could move interstate and begin teaching in another jurisdiction before employers or
regulators are aware. This has necessitated greater coordination between states on a shared IT solution toensure information sharing of cross border practitioners is tracked and notifications are timely. This work
presents an opportunity to go further and establish a coordinated data sharing system that captures all
information on a licensed practitioner, not just notifications for AMR purposes.

34 This includes all licence types, not only occupational licences.

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Single Practitioner View
Digital licensing can play a role in government initiatives aiming to create a single digital identity by extending
a consistent national digital ID to registration and licensing schemes. This would help integrate andstreamline information that a licensee must provide to regulators and provide accessible and better quality
information for consumers about licensed workers. For instance, Services NSW has developed a licensing
platform that brings together a range of licences across health, security, trades, real estate and gaming
sectors. This can give practitioners the ability to update and manage their licences digitally, while potential
consumers can use the platform to access an up-to-date snapshot of the practitioner’s licences,qualifications, insurance, and compliance track record (figure 3.5).
The NSW licensing platform also demonstrates it is possible to consolidate data from various agencies andlegislative arrangements. The platform currently brings together licences administered through NSW Fair
Trading (responsible for the majority of occupational licences in NSW) and other agencies such as surveying
licences through the registrar of the Board of surveying and spatial information and security licences throughthe Commissioner of Police.
A single practitioner view can provide an opportunity to consolidate several background checks that areundertaken and improve the administrative effectiveness of regulators compliance and enforcement
capabilities. Currently, there is considerable overlap between national police checks, working with children
checks and character checks performed by licensing agencies. Consolidating these character checks
through digital integration can improve efficiency in the management of licensing systems and reduce theadministrative burden on licensees (box 3.9). These challenges have been seen in the administering ofWorking With Children Checks (WWCC), with a report into the functioning of WWCC noting theadministrative efficiency gains of integrating with the national police database:[Current WWCC] arrangements do not currently enable agencies to access cardholders’ national
criminal records, meaning that continuous monitoring is restricted to records arising in thejurisdiction that issued the WWCC. The practical effect of this is that a cardholder could commit
an offence in another jurisdiction that remains undetected until their WWCC is due for renewal,
which, if known, would result in the cancellation of their WWCC.
Many submissions on Issues Paper No 1 noted that WWCC renewals are needed at regularintervals until continuous monitoring is expanded to include national criminal records, so that new
relevant records are identified and assessed. For example, Victoria reported that, since their WWCC
scheme commenced in 2006, approximately 54% of all negative notices were issued to existing
cardholders, demonstrating the value of this type of monitoring. (Royal Commission 2015, p. 108)88

Occupational licensing and registration

Figure 3.5 – New South Wales’ digital licence platform
A snapshot of publicly available information on licensed practitioners

Source: Service NSW (2023).

89

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 3.9 – Character checks for electrical licences in Western Australia
The Department of Mines, Industry Regulation and Safety (DMIRS) has proposed reform to electricallicences that would enable fitness and propriety checks to be required for licence renewal in addition tochecks that are done at the initial granting of an electrical licence.
The proposed change is motivated by concerns that an individual’s recent behaviours are unknown to
the licensing authority that would disqualify them on character grounds. The DMIRS highlighted anincident in which a licensed individual committed a serious criminal offence for which they were later
convicted while performing electrical work in someone’s home. The Director of Energy Safety was only
made aware of this when the individual applied for a separate licence through another licensing authority,
who performed an updated character check and subsequently alerted the Director of Energy Safety. Had
the individual not applied for the additional licence they would have remained licensed and able topractice as an electrician.
Even if the proposed change was implemented, electrical licences are typically renewed every five years,
meaning it would still be possible for a person to commit a serious criminal offence and continue topractice for several years before renewal is required.
This proposal would add to administrative costs on the agency, while removing the incentive for DMIRS
to pursue streamlining of licences in the future. Indeed, under this mechanism there would be rationale
for shortening the renewal period to ensure more up to date monitoring of licence holders. The reforms
also considered eventually replacing statutory declarations with a national police certificate for fitness
and propriety checks, which would add about $0.8 million in annual costs to licence holders.
Source: DMIRS (2022a).

The Australian Government has since established a national database for WWCC through the Australian
Criminal Intelligence Commission that will allow states and territories to integrate their own systems andaccess continuous national records on WWCC holders (Australian Government 2022a, p. 177)
States and territories should work towards implementing a similar national solution for licensing andregistration. This will require states and territories to coordinate when implementing or expanding their digitalplatforms, including by pursuing:••••technology neutral options for information sharing
standardisation of licensing concepts and related data items across jurisdictionsalignment of strategies and frameworks on cyber security, data sharing, and other data management practices
investigating options to link licensing systems with WWCC and national police check systems.

The creation of an easily accessible and verified view of a practitioner’s background and competency
represents a significant improvement in market information. States and territories will need to reassess therationale for licensing where information asymmetry may be better alleviated through improvements to
consumer choice facilitated through digital licensing platforms.

Enabling a better evidence base
The increasing adoption of digital platforms also provides an opportunity to improve data collection on licensing
and allow researchers and policy makers to fill the considerable gaps in knowledge that exist on the impacts ofoccupational licensing in Australia. Many of the costs and benefits of licensing have remained theoretical and90

Occupational licensing and registration

impossible to quantify with the available data (section 3.2), and scepticism exists in utilising any international
research on the impacts of licensing (Senate Red Tape Committee 2018). The OECD has argued better datacollection is a critical next step for Australian policy makers to pursue meaningful reform of occupational
licensing — for instance through inclusion of licensing questions in the ABS Labour Force survey (OECD 2021,
p. 51). In the United States, the pace of licensing reform has increased significantly since 2015, in part due tothe availability of data and growing empirical evidence on licensing outcomes (Thornton, Timmons andKukaev 2021). Australian research is needed to begin understanding the true costs of licensing schemes inAustralia and enable policy makers to clarify the value in pursuing more ambitious reform.
The lack of data in Australia is a considerable barrier for regular review and assessment of licensing policy
because each new initiative must either conduct a new survey or rely on a previous survey’s data that is
likely out of date and narrow in scope. Agencies conducting reform of individual licences in Australia rely on
limited administrative and compliance data that is not fit for purpose — leading to judgement calls on the net
benefit of licensing not backed by evidence (box 3.6).
In the United States, previous research had relied on an imputation strategy that would infer licenceattainment based upon occupational affiliation and the state they worked in. The inability to directly measure
licensure and certification was seen as a major barrier to empirical work and estimates using the imputation
strategy were found to be biased (Gittleman, Klee and Kleiner 2018, p. 65). This began to change with theintroduction of licensing and certification questions in the Survey of Income and Program Participation in2008 and annual data from the bureau of labour statistics from 2015. Since then, the volume of research on
licensing impacts has grown, with numerous studies conducted using this data to measure the labour market
impacts of licensing in the United States (Bambalaite, Nicoletti and von Rueden 2020). The recent availabilityof administrative data has allowed integration with longitudinal business data, providing further accuracy toestimates and a more detailed picture of licensed workers and the businesses hiring them (Zapletal 2019).
Researchers have also been able to combine this data with digital product and service platforms to provide
insights into the quality impacts of licensing (Farronato et al. 2020).
If states and territories pursue integrated, standardised and technology neutral digital licensing (see previous
section), high-quality administrative data could be made available for researchers and policy makers toutilise. Access to this data would also enable the ABS to link administrative data into integrated datasets35 toprovide a more complete picture on licensed workers. This data asset could be used to investigate the
distributional impact of licensing on wages, impacts on firms by size and competition effects throughchanges in entry and exit rates.
Detailed administrative data would also create opportunities to explore the potential benefits of licensing.
This would require states and territories to investigate other administrative data sources that could be used
for analytical purposes or current data collection that could be improved. In building and construction, many
Australian agencies are already tasked with collecting data on the quality of outputs, such as compliance,
dispute and incidence data. Reform should focus on improving the analytical value of this data because it
typically does not provide regulators with enough detail to understand the links between licensing design andoutcomes. Furthermore, integration of this data into a national database would give policy makers a detailed
view on the links between licensing arrangements, labour market outcomes and worker outputs. For
example, it could provide a detailed view on the employment, wage and compliance impacts of mandatory
CPD in building and construction trades that is currently being implemented across jurisdictions.
Current policy variation across states and territories could become a strength if utilised for research — for
instance, different licensing requirements for a car repair mechanic could be used to investigate the

35 For instance Business Longitudinal Analysis Data Environment (BLADE) and Multi-Agency Data Integration Project (MADIP).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportincidence of road deaths related to mechanical failures; different levels and classes of licensed work in many
trade occupations could be compared with labour market outcomes and compliance across jurisdictions; anddiffering thresholds for building licences and insurance requirements could be compared with defects anddisputes. Laying the groundwork for more rigorous assessment of licensing design choices would reduce
inefficiencies and have positive long-term impacts on productivity.

Recommendation 7.12
Digital licensing designed to enable future data sharing and analytics
State and Territory Governments should continue to develop digital licensing platforms, prioritising choices
in technology and design to enable future integration, information sharing and analytics.

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4.

Effective workplace relations

Key points
The workplace relations system has a fundamental role in driving productivity and wages, but needs
repair to achieve those outcomes, including a greater emphasis on co-operation between parties.
The award system has grown in significance as enterprise bargaining has shrunk, but needs to become
more efficient and flexible, in part because they set a floor on conditions in enterprise agreements.
• The modern awards objective should be simplified and, with the minimum wages objective, be the test used
to judge award variations, which should be able to occur for all aspects of awards at any time.
• An award review process that concentrated on material defects — including in the wage relativities of thehundreds of minimum wages — would be fairer and more efficient than the current more restricted criteria
used by the Fair Work Commission to vary awards.
• Award regulatory technology (‘regtech’) and education initiatives — such as tailored advice for small
businesses on award compliance — can help businesses better navigate awards.

• The Fair Work Commission should increasingly look at introducing menu options into awards that give
employers choices about how to be compliant with the modern awards objective rather than specifying
inflexible single options.
Enterprise bargaining needs reform to provide the mutual benefits and productivity gains that were its
original intent.
• Effective bargaining can be as much about the culture of a business as the law and is influenced by thewillingness of employer and employee peak bodies to co-operate for changes that promote a resilient
economy and productivity — as evidenced briefly by co-operation during the early stages of the pandemic.
• While the 2022 Amendments to the Fair Work Act reduced some flaws in the Better of Overall test, it could
be further improved by requiring that the Fair Work Commission approves an agreement if it passes a
rigorous set of tests that leave most workers better off even if some are adversely affected.
• Agreements may sometimes include conditions that limit the efficient management of a business. While it isdifficult to anticipate and prohibit all the conditions that may do this, where a problem emerges, theFair Work Act should be amended to limit the effect of such conditions.

• In that respect, consultation clauses in some agreements are blocking initiatives to improve the productivity
and efficiency of businesses. Allowing the model consultation term in awards to have legal effect over more
stringent terms would resolve this. This would not prevent parties from negotiating alternative mutually
beneficial alternatives, nor stifle employers’ obligations to consult with employees about workplace changes.
The revamped multi-enterprise bargaining streams may assist parties that have been left out of thesingle-enterprise bargaining system, but whether it succeeds in that objective, and its potential impacts
on flexibility and productivity should be a focus of the scheduled review.

93Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

4.1

An evolving workplace relations environment

The design of Australia’s workplace relations (WR) system has wide-ranging impacts on co-operation
between bargaining parties, wage determination and business decision making and costs — which in turncan affect productivity.
Our assessment of the WR system is against a background of significant change over the past decade andtherefore narrower in its focus than the comprehensive inquiry into the system undertaken by the Productivity
Commission in 2015 (PC 2015c). A greater reliance on awards has increased the need for an effective
award determination process (section 4.2). There is a need for reforms to support enterprise bargaining,which is the form of arrangement seen as most suited to productivity and associated real wage growth(section 4.3). This is especially against the background of recent amendments to the Fair Work Act 2009(Cth) (FW Act) to expand the options for multi-enterprise agreements. Meanwhile, the gig economy has
grown rapidly, challenging the distinction between employees and contractors (creating policy conundrums
that are addressed in chapter 5).
At some level, what constitutes desirable labour market outcomes from a workplace relations perspective isuncontentious. Labour markets function well when people can find work, acquire skills, and move jobs withrelative ease; where employers can hire the workers they need, and skills are put to their most productiveuse (both within firms and across industries); where greater contributions to productivity are rewarded via
better pay and conditions; and when there are adequate worker protections, recognising that labour is aunique input subject to ethical and community norms (PC 2015c, p. 2, 2017a, p. 85).
However, there are diverging views about how the WR system should best contribute to these outcomes. In
part, this reflects that judgments about fairness are subjective, and that bargaining can involve compromises
between competing demands. It may also reflect the inevitable trade-offs of regulatory design — attempts toencourage efficient and fair bargaining outcomes and deterring potential misconduct by parties can haveunintended consequences, incidental effects on compliance cost, and place excessive demands onregulatory resources.
While adversarial workplace disputes can sometimes arise, this masks the fact that employees andemployers generally have strongly aligned incentives to improve productivity because this can increase
both profits and wages. An important role of the WR system is to ensure that productivity opportunities are notdestroyed by poor incentives, conflict, unnecessary complexity and high compliance burdens.
The long and changing list of factors determining outcomes from workplace regulation (box 4.1), is a major
challenge for policymakers. The generic law must be sufficiently flexible that it can address most of theworkplace issues that arise in quite different contexts. While bargaining may often proceed without problems,
at other times, bargaining agents have used excessive power to attempt to game bargaining arrangements
or have engaged in some form of misconduct. There may be grounds for some carveouts from the genericlaw when high thresholds have been met (as in the maritime industry),36 but in general, a bespoke set of
regulations adapted to each specific context would be unworkably complex.

36 Discussed in the Productivity Commission’s (2022d) inquiry report on Lifting productivity at Australia’s container ports.

94Effective workplace relations

Box 4.1 – The effects of workplace relations regulation are highly context-dependent
The balance of bargaining power, the impact of workplace relations on productivity, and the nature of firm
and union conduct varies according to:• economic conditions (which determine both commercial opportunities and skill shortages) will varyover time (for instance, as consumer preferences change) and at any given point in time, will differ
between industries and geographic regions• the role of labour in production processes, which has evolved as Australia shifted to a services-centriceconomy and will continue to change as technology progresses. Three aspects of the services sector
particularly influence workplace relations — it tends to be less capital intensive, has a greater share oflower-skilled workers, and governments regulate and often fund them (as in education, aged anddisability care, the public service, emergency services, and much of healthcare)• broad trends that influence labour supply, such as the supply of particular skills (via education,
training, and migration), population growth and ageing, and participation• factors that affect individual workers, such as search costs, impediments to participation and mobility,
and thin markets (such as in regional and remote areas)• union density (the share of employees in unions) remains high in some sectors, but overall reached arecord low of 12.5% in 2022 (ABS 2022f)• technological change and its potential to displace labour — both terms of hours of labour at themargin, and changes to job descriptions and requirements.

4.2

Awards are growing in policy significance

While only a minority of employees rely solely on awards to determine their wages and conditions, awards havegrown in significance (figure 4.1). This has principally been driven by the waning attractiveness of enterprisebargaining, particularly for businesses with lower paid workers, such as health care and social assistance (forexample, including aged care workers), administration and support services, and accommodation and foodservices.37 Remarkably, the number of non-managerial employees on collective agreements barely changed in
between 2010 and 2021, while the number reliant on awards grew by nearly 100%. The number of
non-managerial employees on individual agreements has grown by 30%, maintaining their parity as a share of
employment arrangements. Such agreements are a source of significant flexibility as they allow employees andemployers to negotiate different wages and conditions so long as these exceed the award.38

37 Although the share of people whose wages and conditions are solely determined by awards has risen in the past

decade, these numbers still represent a much lower share of award reliance than historical experiences. During the
middle of the 20th century and prior to the introduction of enterprise bargaining, awards directly set wages and conditions
for more than 90% of employees (Mitchell 1998).
38 Some individual arrangements include individual flexibility agreements, which offer more flexibility, and these are also
used by some employees in businesses covered by enterprise agreements.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Figure 4.1 – Awards have grown in importance for non-managerial employees

Share of non-managerial employees (%)

2010–2021
50

46

45

43

45

41
38

40

37

40
37

37

36

37

38

35

30
25
20

20

25

23

22

18

16

15

10
5
0
2010

2012
Award

2014
Enterprise agreements

2016

2018

2021

Individual arrangment

Source: ABS (Employee Earnings and Hours, Australia, various issues, Cat. no. 6306.0).

The change in the latter industry partly reflects that some large employers returned to the award after the
Fair Work Commission (FWC) terminated their enterprise agreements (EAs), such as in the case of
McDonalds (a Fair Work era agreement) and Nandos (a pre-Fair Work era agreement). In 2018, 24% ofaccommodation and food services employees in large businesses (more than 100 employees) had their pay
determined by an award, increasing to 54% in 2021. In the same timeframe, the share having pay
determined by an EA declined from 65% to 37%.
Why the trend away from enterprise bargaining has occurred and its significance for future policy settings forenterprise bargaining is discussed later (section 4.3), but the shift has highlighted the importance of awards inAustralia’s WR system. Notwithstanding its dramatic growth and that about 2.7 million employees were on theaward in 2021, the award system has been a neglected aspect of public debate about workplace relations.
In the context of bargaining, awards provide a fall-back position in case negotiations fail or bargaining isdeemed too costly and sets the benchmark level of wages and conditions that, under the Better Off Overall
Test (BOOT), an EA cannot fall below, even if it is only for a single employee. The inextricable links between
enterprise bargaining and awards means that any defects or virtues in awards tend to be inherited byagreements. Moreover, the FWC’s decisions about changes in the hundreds of minimum wage levels thatare specified in more than 100 awards (and within awards across multiple classification levels) partly
influence the wages of other employees because otherwise wage relativities would become increasingly
compressed and out of step with the varying productivity of different employees. That link is often explicit asa significant share of agreements have annual wage increases linked to the minimum wage (DEWR 2022,
p. 33). Outside their flow-on effects on enterprise bargaining, the award system is intended to meet socialand equity goals (a specific feature of the modern awards objective in the FW Act) and to counter thebargaining power that employers could sometimes wield (Breunig and Rose 2019, pp. 25, 29).
Awards can affect productivity in varying ways. Given each award prescribes often unique wages andconditions, they affect wage relativities between tasks within a business, age groups, occupations, andindustries. This may limit the efficient and productive allocation of labour across the economy. It may also96

Effective workplace relations

affect people’s initial education choices and the incentives of workers and businesses to acquire skills overtheir working lives. Their complexity increases business costs. On the other hand, for employers within the
coverage of a given award, the least productive businesses would not be able to compete simply by lowering
wages or conditions — if forced to exit, the reallocation of resources would promote aggregate productivity(Braun 2011). Further, their prescriptive nature may reduce the costs of bargaining wage levels for some
employers. As noted by the Hon. Reg Hamilton:
It may be that employers and perhaps unions should not use approved enterprise agreements asmuch as in the past and should now rely more on awards in some sectors where market rates areclose to award rates given the difficult calculations required if penalties are to be rolled up in asingle annual rate, for example. (sub. 50, p. 26)
While any given award is prescriptive in its requirements, viewed over time, the award system is more
flexible than it might seem at first glance. As noted by O’Neil (2021, p. 425):… during the pandemic awards proved to be a mechanism that could quickly facilitate broad changes
without the need to wait for parliamentary processes or workplace-by-workplace negotiations.
While the 4 yearly award review39 process is in its final stages, award review remains an ongoing feature of theawards system. As noted later, s.157(1) of the FW Act gives the FWC significant powers to vary some aspectsof awards so long as the variations meet the modern awards objective. Moreover, on its own initiative the FWC
added a temporary schedule (schedule X) to multiple awards to address some of the problems that the
pandemic posed for employers and employees. It is possible (though untested) that changes in working
arrangements in many businesses originate from award changes rather than enterprise bargaining. While
workplace culture, not so much black letter law, is a central aspect of a productive workplace regardless ofwhether a workplace is award reliant or otherwise, a problem confronting enterprise bargaining in someindustries is that poor culture can be reflected in highly restrictive terms in an agreement (PC 2022d).
In light of its central role in the workplace relations system and its far-reaching impacts, the effectivefunctioning of the awards system is critical to a productive and adaptive economy.

An award system geared to a future economy
The FW Act sets out complex processes to make, vary or revoke an award, or to vary award minimum
wages (box 4.2). There are opportunities to improve the criteria that must be met during these processes,
including by:• improving the clarity of the modern awards objective• better facilitating variations to awards that improve outcomes under the modern awards objective.

Implementing a clearer modern awards objective
While the minimum standards set out in awards play an important role in the context of community norms
regarding fairness, the awards system entails various other economic effects and compliance costs. The
modern awards objective is one source of the complexity of awards and a potential barrier to theiradaptability. The FWC is required to balance ten considerations in the modern awards objective (defined ins.134 of the FW Act) when varying award minimum wages or when making, varying or revoking awards(box 4.2). As noted by the FWC, no single matter is given primacy:

39 Before 2018, the Fair Work Commission was required to review all modern awards every 4 years.

97Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

The obligation to take into account the s.134 considerations [in the modern awards objective]means that each of these matters, insofar as they are relevant, must be treated as a matter ofsignificance in the decision-making process. No particular primacy is attached to any of the s.134
considerations and not all of the matters identified will necessarily be relevant for a particular
proposal to vary a modern award. (FWCFB 8092 Pest Control Industry Award 2010 —Substantive claims [2019], 2 December 2019, at 13)

Box 4.2 – The modern awards system
The processes for varying, creating or revoking a modern award
There are different processes for varying, creating or revoking a modern award, depending on whether
changes relate to award minimum wages, the default superannuation fund term or other aspects in anaward. For award minimum wages, the process will also depend on whether changes are made during
the annual wage review — where an Expert Panel reviews the National Minimum Wage and modern
award minimum wages — or outside of the review.
The FW Act defines in which circumstances the FWC can make, vary or revoke awards on its own
initiative, or on application by an eligible party. Eligible parties are generally employers, employer
organisations, employees, unions or outworkers that are affected by the award.
• An award may be made, varied (other than to vary minimum wages or a default fund term) or revokedunder s.157(1) of the FW Act, on the FWC’s initiative or on application under s.158. The FWC must be
satisfied that these change is necessary to meet the modern awards objective. Additional criteria apply
to changing the coverage of a modern award or to revoke an award.
• Outside of the annual wage review, award minimum wages can be varied under s.157(2), on the
FWC’s initiative or on application under s.158, if the variation is justified by work value reasons and if
the variation of award minimum wages outside of the annual wage review is necessary to achieve themodern awards objective.
There are three criteria from the FW Act that may apply to award variation, depending on whether thedetermination is relating to minimum wages (and if so whether the determination is outside of the annual
wage review):• the modern awards objective, which must be satisfied by awards in tandem with the NES (s.134)• the minimum wage objective, which applies if the FWC is setting, varying or revoking award
minimum wages (s.284)• work value reasons, one or more of which the FWC must meet if choosing to vary minimum wages
outside of an annual wage review (s.157(2A)).
The FWC can also make a determination to vary an award, including award minimum wages, to remove
an ambiguity or uncertainty or to correct an error under s.160, or upon referral by the Australian Human
Rights Commission under s.161. Minimum wages may also be increased by an equal remuneration ordermade under s.302, which will override less beneficial modern award minimum wages.
Sources: Australian Government (2008); Gillard (2008); Stewart et al. (2016); Fair Work Act 2009 (Cth).

A more streamlined modern awards objective could reduce complexity, improve transparency and assume abroader community wellbeing perspective when determining appropriate award content (recommendation 7.13).
98Effective workplace relations

To that end, the modern awards objective could be made clearer and better targeted by replacing theparagraphs of s.134(1) with seven paragraphs that cover: a) the needs of the employed, b) the need toincrease employment, c) the needs of employers, d) the need to achieve gender equality in the workforce,e) the needs of consumers, f) the need to ensure modern awards are easy to understand and g) the likely
impact of any exercise of modern award powers on efficiency and productivity (recommendation 7.13). Sucha change would give relatively greater prominence in award determination to the unemployed andconsumers who are not often represented in FWC hearings. This does not mean the seven considerations
need be given equal weight, nor that a given consideration be given presumptive primacy (PC 2015c, p. 374)
— consistent with previous Full Bench rulings. Decision making would prioritise the wellbeing of the overall
community and would be informed by consideration of likely benefits and costs (and the expectedmagnitude, incidence and persistence of effects) of award changes to stakeholder groups.

Allowing for award variations to improve outcomes beyond ‘the extent necessary’ toachieve the modern awards objective
The FW Act can limit the degree to which the FWC can make improvements to awards. The FW Act (s.138)
states:[a] modern award may include terms that it is permitted to include, and must include terms that itis required to include, only to the extent necessary to achieve the modern awards objective and(to the extent applicable) the minimum wages objective.
This has raised the issue of the distinction between award variations that are ‘necessary’ to meet the modern
awards objective and variations that are ‘desirable’ to improve the objective’s outcomes variations. As
Justice Tracey of the Federal Court highlighted:
That which is necessary must be done. That which is desirable does not carry the same
imperative for action. While this distinction may be accepted it must also be acknowledged thatreasonable minds may differ as to whether particular action is necessary or merely desirable.
(Shop, Distributive and Allied Employees Association v National Retail Association (No 2) [2012]
FCA 480, 11 May 2012, at 46.)40
The FWC has at times interpreted s.138 to include proposals to vary awards that better achieve the required
objectives,41 though it cannot be assumed that this would characterise any decision about variations.
Certainty could be achieved by amending the FW Act to allow award variations in awards that meet themodern awards objective, but that could be improved (recommendation 7.13).
This may appear to be a trivial change, but it can be likened to the difference between just meeting somestandard and exceeding it. Excellence is achieved by the latter. The reform would provide an avenue foraward revisions that flexibly maximised potential outcomes — especially as what is ‘desirable’ changes witheconomic and labour market developments.

40

The distinction made by Justice Tracey in 2012 was referred to again in a 2022 Full Bench of the FWC ruling regarding
the wording in the plain language redrafting of shutdown provisions in awards.4 yearly review of modern awards—Plain
language—Shutdown provisions [2022] FWCFB 161, 25 August 2022, at 43.
41 For example, the Appeal by Australian Municipal, Administrative, Clerical and Services Union [2013] FWCFB 1228, 5March 2013, at 39. and in Menulog Pty Ltd [2021] FWCFB 4053, 12 July 2021. Menulog’s claim that a new on-demanddelivery services award would ‘better achieve’ s.134(1)(g) of the modern awards objective compared with varying an
existing award was not rejected by the FWC, although the FWC asked that Menulog provide further submission andevidence for the claim, among Menulog’s other claims relating to the modern awards objective.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportAward complexity and flexibility
Despite the significant streamlining of awards during the modernisation process, the Productivity
Commission’s 2015 inquiry into the Workplace Relations Framework found a broad range of flaws in awards,
even in the presence of existing individual flexibility arrangements42 (PC 2015c chapter 8). Examination of
the content of current awards suggests that this situation has not greatly changed since 2015.
Complexity can make it hard for employees to discover whether they have received the right pay and impose
compliance costs on employers and create uncertainty about whether they have met the obligations set out
in the FW Act. Moreover, the rigid imprint of history on current arrangements still plays a major role in theircontent.43 There is relative inertia in the pay relativities, allowances, rostering and other arrangements that
affect the organisation of a business and the wellbeing of employees, and, and until recently, penalty rates.
Labour markets can change much more rapidly than awards.
There are two broad, but associated, policy approaches to these issues. There are grounds for:• a systematic process for appraisal of features of those awards that reduce productivity and economic
prosperity, are unfair or no longer fit for purpose• reducing the compliance costs of using awards through award regulatory technology (‘regtech’), andmaking awards easier to understand through education programs and the continuation of the FWC’s plain
language redrafting program.
The first approach will often, but not always, entail the second.
Changing awards is not about tilting the conditions of an award in favour of one party or another. If changes
to an award — for example, those arising from changes in work practices — raises productivity, the FWC
would have a greater capacity to make larger changes to award wages.

Reforming the rigidities of awards, while retaining their basic features
Reinstatement of periodic reviews of all awards would be a costly exercise, particularly given that many
awards are unproblematic. At the same time, with the abandonment of the 4 yearly award review process,the FWC has been left with a varied capacity to change award features. It has a high level of flexibility inamending aspects of awards that do not relate to modern award minimum wages, such as hours worked androstering. But it is unable to vary the 100s of award minimum wages,44 except:• in its annual wage review, though typically the percentage increases in award minimum wages are thesame across and within awards and so not a mechanism for revisiting whether the initial wages areappropriate across the more than 100 modern awards45

42 Individual flexibility arrangements are clauses in awards that allow employers and employees to agree to variations ofwhen work is performed, wage rates, overtime rates, penalty rates, allowances and leave loadings.
43 For instance, the General Retail Industry Award 2020 contains the Broken Hill Allowance, an additional allowancepayable to award-covered employees in Broken Hill in lieu of a fifth week of paid annual leave, which had been removedby the Fair Work Commission during the creation of modern awards. Four weeks paid annual leave is the minimum
entitlement under the NES (SDA 2019).
44 There are a few other exceptions, but these are esoteric.
45 There have been a few (constrained) exceptions to this. For example, the annual minimum wage determinations for2020 to 2022 were phased in at different times depending on the award — reflecting concerns that the potential
disemployment impacts of the COVID-19 pandemic might be different across different industries. In addition, wage
relativities were slightly compressed in 2022 because there was a flat $40 a week increase for low-paid workers, but a
4.6% increase for employees above the $869.60 weekly threshold.
100Effective workplace relations• between annual wage reviews, but only for ‘work value reasons’ (alongside the requirement that varying
award minimum wages outside the annual wage review is necessary to achieve the modern awards
objective, and that the minimum wages objective is also met) under s.157(2) of the FW Act, which arefactors deemed to justify an employee’s pay, including the nature of work, the level of skill or responsibility
in doing the work and the conditions under which the work is done.
The reach of these restrictions is potentially wide given the large number of minimum wages set in awards
and that they relate to almost all types of occupations, including academics, pilots and doctors. The
requirement that work value reasons are necessary to justify consideration of award minimum wages
revisions between the annual wage reviews embeds too narrow a framework for wage setting.
The 2022 FWC case relating to minimum wages for direct aged care workers provides an illustration of someof the difficulties. The FWC handed down an interim 15% increase in various award minimum wages basedon work value.46 In doing so, the FWC principally relied on two rationales for higher pay:
• that wages were low because of gender biases• the skills required and the complexity of tasks to undertake aged care work had risen over the past two
decades.
The framework underpinning work value reasons presumes that a given set of defined tasks has an objective
value to society or the economy, and that a disinterested party — the Fair Work Commission in this case — iswell-placed to determine this value independently of the actual outcomes of labour markets. The principle isthat ‘aligning rates of pay in one modern award with classifications in other modern awards with similar
qualification requirements will support a system of fairness, certainty and stability’.47 At various times, workvalue cases have accordingly sought to find comparator rates that match skill levels. For instances, in
successive work value cases, the so-called ‘C10 Metals Framework Alignment Approach’ — which takes thewage rate for a Certificate III classification in the manufacturing award as a starting benchmark — has been
influential.48 Work value is driven principally by the premise that it would be unfair and socially unjust to pay one
set of workers with similar skills and tasks in one industry less than those in another. Accordingly, work value islargely a social goal and does not necessarily relate to the desirable outcomes of efficient labour markets.49
Yet the latter should play a significant role in setting wage relativities, including when labour markets are notfunctioning well. For example, in the aged care market, governments loom large as rule-setters, priceregulators and funders of services, such that they have a capacity to influence the labour markets of these
services and are aware that wage cost pressures will be reflected in fiscal pressures. Even had there been
no work value reasons, arguably the nature of the aged care labour market alone should have justified close
examination of relative bargaining power and the potential for it to exert an inefficient downward pressure on
wages in this sector. In this case, labour market considerations would suggest increases in minimum wages
regardless of work value reasons, though pinning down the appropriate increase would be difficult, as it is

46 Applications to vary modern awards – work value – Aged Care Award 2010 – Nurses Award 2020 – Social,

Community, Home Care and Disability Services Industry Award 2010 – Decision, [2022] FWCFB 200, 4 November 2022
47
[2022] FWCFB 200 at 192.
48 The application of the C10 approach does not mandate that wages all be set equivalent to one or other of the relevant
classifications in the relevant award but is a starting point ([2022] FWCFB 200 at 179). At times, the other benchmark is
set by wages associated with different qualifications under the Australian Qualifications Framework.
49 This is not to say that what happens in labour markets is free of the biases of employers, regulators and society
generally. For example, Broadway and Wilkins (2017, p. 26) argue that it is likely that ‘award-wage decisions have been
influenced by observed “typical” wages in industries and occupations, and male-dominated fields have benefited from along history of strong unionisation that led to higher average wages’.
101Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportusing the work value framework. In this case, work value and labour market reasons coincide in concludingthat the minimum wages in the relevant industry awards probably anchor wages at too low a level.
However, the two frameworks may reach contradictory conclusions in other cases. The rationale for inertia inwage relativities based on work value reasons is likely to be problematic under certain labour market
conditions. Minimum pay rates in certain awards for given classifications may become too high, affecting theviability of businesses that intensively employ such employees and the demand for the particular type of labour.
A potential saving grace of current arrangements is that the award system sets floors for wages at different
classifications, rather than ceilings. It is therefore possible for an employer to vary wage relativities by paying
more than the award wage for certain classifications. Nonetheless, this will have significant effects on theoverall wage costs of the business. Moreover, the apparent capacity to freely raise wages for any givenclassification above its award level may be constrained in enterprise bargaining if employees collectively
wish to protect the award relativities (Broadway and Wilkins 2017, pp. 9–10).
In this context, the FWC’s settings for the hundreds of minimum wages across the more than 100 awards
should give much greater prominence to the relevance of labour markets including, among other factors, theeffects of the current wage relativities on the demands for skills, educational qualifications and occupations,
the way labour is organised in businesses, and the incentives for labour mobility and training.
The restraints under s.157(2) of the FW Act and the FWC’s practices in the annual wage review limit a wider
consideration of the factors that should inform award minimum wages. As such, while work value reasons
may still have relevance to a variation in award minimum wages outside an annual wage review, it should be
removed as a requirement for any such variation. Instead, the FWC should have the same power to adjust
award minimum wages in award reviews as the minimum wage panel currently has in the annual wage
review (recommendation 7.13).
The new approach would not eliminate consideration of work value reasons so long as these were relevantto the criteria set out in the modern awards and minimum wage objectives, or with an equal remuneration
order. Instead, it would open up wage determination to all of the factors that the FWC can consider whensetting other aspects of awards. For example, the FWC’s penalty rates decision50 was based on
consideration of the labour market and business effects of such rates and did not implicitly or explicitly apply
a work value framework. The criteria were purely those set by the modern awards objective.
Adopting this broader approach introduces greater consistency in award decisions because the benefits toan employee of an award relates to all of its contents — and not just to minimum wages. Furthermore, theseparation of modern award minimum wages from other aspects of awards makes it difficult to consider
reforms to specific awards that seeks to trade these off against each other or that take into account the way
labour markets are functioning.
Where a broader approach benefits both employers and employees, it would be conceptually in step with one
goal of enterprise bargaining — the discovery of changes that overall create mutual benefits. However, notably,
there is no equivalent to the BOOT in award changes, so it is possible that under this new model, the FWC could
make a change to awards that leads to gains for many workers even if some are made worse off. In fact, even a
net employee benefit is not required (for instance, in the FWC’s changes to penalty rate in 2017, many rates were
dropped without compensating increases in ordinary time wage rates).51 Conversely, in circumstances where agroup of employees have low bargaining power and are unlikely to benefit from enterprise bargaining, then

50 4 yearly review of modern awards - Penalty Rates, [2017] FWCFB 1001, 23 February 2017.
51 [2017] FWCFB 1001.

102Effective workplace relations

changes to specific awards could be a vehicle for providing pay increases that are higher than those usuallyprovided through annual wage reviews, as was the case with the Aged Care Award 2010.

Developing an adaptive award review process
Previous (now abolished) 4 yearly reviews of awards involved reviewing every clause from every award andwere resource-intensive for parties wishing to participate in the process, as well as the FWC. Reviews thatare excessively time-intensive may deter potential parties who wish to participate.
Future award review processes should be structured to avoid the pitfalls of the (now abolished) untargeted
4 yearly reviews of modern awards (PC 2015c, p. 341). A simpler approach would be that the FWC identify
awards that have significant deficiencies in their wage relativities or some common flawed feature across awards(‘hotspots’ as described in PC 2015c, p. 369) and then modify these based on its own research and evidence
presented by external stakeholders, such as union and employer groups. It could undertake this task at any time.
The FWC could particularly focus its assessments on aspects of awards that:• overly restrict work practices and limit flexibility for employees as well as employers• have wage relativities that are out of step with relative productivities and labour demand• may disadvantage particular types of workers and businesses (say those in some regional areas).
For instance, the level of prescriptive detail applied to classification levels within awards calls for scrutiny.
Many awards prescribe detailed descriptions of tasks and responsibilities for different occupations andlevels. This can be useful in aligning with technical qualifications in some occupations. However, in others,
this degree of prescriptive detail is likely to be unnecessary and may present a barrier to evolving work
practices. For example, the Banking, Finance and Insurance Award 2020 stipulates different pay levels forpeople managing 5–10 staff or 10 or more staff — a distinction that may or may not be relevant to the degreeof responsibility in many modern workplaces. Excessively prescriptive terms of this kind can also be a sourceof undue inflexibility for bargaining to the extent that proposed agreements are tightly tied to the award via
the BOOT (as discussed further below).
Various stakeholders made suggestions about potential award reform options. For instance, the Ai Group
proposed awards could be improved by moving sections to the NES:
Matters that are primarily dealt with in the NES should be largely removed from awards andreplaced with references to the NES provisions, just like what has occurred with casual
employment definitions and casual conversion provisions. A similar approach should be takenwith annual leave, personal/carer’s leave and other topics that are primarily dealt with in the NES.
(Ai Group 2022, pp. 1–2)
The NES provides a set of rights and entitlements for all employees, which cannot be excluded or lessened
under any form of agreement or individual arrangement.52 Placing an entitlement in the NES instead ofindividual awards could represent a strengthening or weakening of an entitlement for different classes of
employees relative to the existing awards if there is a great deal of variation in how an entitlement is
specified between different awards. For instance, some awards — such as the Manufacturing andAssociated Industries and Occupations Award 2010 and the Building and Construction General On-site

52 The Productivity Commission is also undertaking an inquiry on Carer Leave, which examines the potential impact ofamending the National Employment Standards to provide for an additional entitlement to unpaid carer’s leave, with adraft report expected to be released in early 2023.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportAward 201053 — had casual conversion clauses that allowed for conversion for eligible casual employees
after six months of employment, rather than after 12 months as specified in the NES.
Some award terms could be more easily transferred to the NES than others, including administrative
provisions that could apply consistently across awards (for instance the cashing out of annual leave) or
extensions to existing NES provisions currently provided in multiple awards (such as any expansion of theright to request flexible working arrangements). However, whether much harmonisation is desirable, feasible,
and whether the process to achieve it would be efficient is uncertain. Further detailed analysis andconsultation would be required to evaluate the merits of enshrining more award features into the NES.
Ai Group (sub 43, p. 8) highlighted that the need to work hours continuously is less relevant, as specified insome awards, when an employee is working from home. Ai Group also stated that minimum engagement
requirements, rest breaks and penalty rates did not ‘reflect the realities of remote work or working from homearrangements’ (sub IR179, p. 13). However, wholesale modification to awards based on greater working
from home is complicated given many users of awards will still work at a physical workplace and the level of
discretion workers have available to structure their work time while working remotely will vary. For instance, aremote call centre worker’s working hours will be strongly affected by the employer’s opening hours forphone support and the number of calls received. The Business Council of Australia (sub IR181, p. 15)
suggested award simplification could focus on ‘removing complexity in each of the awards, as opposed toprevious attempts to combine awards into a smaller overall number’.

The FWC’s evidence base will be key
Award review should be informed by quantitative and qualitative evidence and analysis and focus onmaterial issues (figure 4.2), recognising that participating in award review processes can in itself beresource-intensive for parties. As an independent body and the ultimate maker, the FWC’s practices are
particularly important, and it should give considerable primacy to rigorous research, including undertakeninternally or commissioned, in making its decisions.
In contrast, while interested parties — usually representing employer, employee or government interests —present evidence to support their held positions, not all of their evidence is robust or of the same quality. Indeed,
FWC decisions frequently refer to deficiencies in evidence provided by some parties (PC 2015c, p. 341).
Nevertheless, the FWC should continue to use information and ideas provided by stakeholders, including via
applications to vary awards. The FWC should also survey employers on the aspects of awards that restrict work
practices and consult with employees on where awards could be improved (recommendation 7.13).

53 Manufacturing and Associated Industries and Occupations Award 2010 [MA000010] as at 4 December 2017 and

Building and Construction General On-site Award 2010 [MA000020] as at 20 November 2020.
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Figure 4.2 – A new way of assessing and addressing award deficiencies•
Identify areas of award
complexity•••

Conduct a detailed and independent survey of employers on whichaspects of awards affect operations most
Collect employee perspectives about how awards affect work practices
and conditions
Evaluate the existence and effect of variations in conditions between
awardsCollect data on the effect of significant adjustments to awards

Rank areas of award complexity in terms of materiality•

Develop policy options•••

Articulate effect of policychanges•

What is the purpose of the type of condition or entitlement? Is thispurpose still relevant? Does the effectiveness of the condition orentitlement to meet this purpose depend on how the condition orentitlement is applied?
Is the type of condition or entitlement an appropriate inclusion in awards
given their role in addressing imbalances in bargaining power?
Are conditions and entitlements effectively meeting their purpose?
What alternatives exist and can they provide greater capacity forinnovation?

How will the change affect the overall income and protection afforded to
employees and the costs to employers?

Consult with all parties on the preferred policy option

Incorporate changes to awards and evaluate effects of changes

Source: Adapted from PC (2015c, pp. 348, 369).

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Recommendation 7.13
A more efficient and fairer approach to adjusting awards
The Australian Government should amend the Fair Work Act 2009 (Cth) to:• replace the paragraphs of s.134(1) with seven paragraphs that cover:(a) the needs of the employed(b) the need to increase employment(c) the needs of employers(d) the need to achieve gender equality in the workforce(e) the needs of consumers(f) the need to ensure that modern awards are easy to understand(g) the likely impact of any exercise of modern award powers on efficiency and productivity.
• remove the need for work value reasons alone for variations to award minimum wages outside of theAnnual Wage Review, allowing the Fair Work Commission to have the same power to adjust award
minimum wages in award reviews as the minimum wage panel currently has in annual wage reviews• make it explicit that the Fair Work Commission should make variations to awards that would better
achieve the modern awards objective, rather than only being required to make changes that arenecessary to comply with the objective• require that when reviewing and varying modern awards, the Fair Work Commission should use robust
analysis to set issues for assessment, prioritised on the basis of likely high yielding gains, and consult
widely with the community on reform options.

The promise of awards as options
The FWC has promoted greater flexibility in awards by giving employers options about how to be compliant
with an award, spurred by the disruption associated with the COVID-19 pandemic, but with long-run
implications. The most notable recent case involved a variation in the Hospitality Industry (General) Award
2020.54 The FWC agreed to give any relevant employer the option to pay a premium on the usual award pay
rate (a loaded rate) to certain groups of full-time employees in exchange for giving up some overtime,
penalty rate and split shift payments. The intention was to avoid making any employee in the given groups
worse off, while leaving it in the hands of the employer whether to take up the option or not:… we would expect that employers will weigh the administrative benefits and any short term
additional regulatory burden when deciding whether to utilise the Loaded Rates Arrangements.
On balance, this factor weighs in favour of making the amended draft determination. ([2021]
FWCFB 5371 at 112)
Various unions opposed changes to the award, primarily because they argued that some employees might
be made worse off. The FWC decided that, on balance, and given other safeguards, this was not a valid
concern (para 52). However, regardless of the merits or otherwise of the cases put by the various parties, the54 Decision by the full bench of the Fair Work Commission in relation to an application to change the hospitality award([2021] FWCFB 5371).
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most important aspect of the decision was that it reconfigured an award into a menu that increased flexibility
about how to manage workplaces.
There are strong grounds for the FWC to take a similar approach in developing options in awards that let theemployer choose the one that most suits their circumstances, but subject to the strict provisos that any
option must still meet the modern awards objective, and that the employer undertakes appropriate
consultation with affected employees (recommendation 7.14).55 The instances where this applies should
extend beyond loaded rates cases to any award where menus are likely to improve outcomes. This does not
require changes to the FW Act.

Recommendation 7.14
Introducing menus into industrial awards
In making variations to awards, the Fair Work Commission should seek to include options that allow
employers some choice about how they can meet award requirements, subject to meeting the modern
awards objective and appropriate consultation with affected employees.

Reducing compliance costs and improving the process of creating awards
through award ‘regtech’
While no panacea for unnecessary complexity, award regulatory technology (‘regtech’) is technology that can help
businesses comply with awards or assist the FWC to adjust award content more efficiently. This would also
recognise that many errors in payment are due to error, rather than deliberate actions. As noted by the Fair Work
Ombudsman (FWO): ‘Underpayments often happen because of a mistake or payroll error’ (FWO 2023).
A related form of technology is used by some businesses to quantitatively assess whether proposed EAs
pass the BOOT.
For employers, award regtech includes ‘award interpretation services’, which can calculate the amount of pay
owed to an employee that is paid exactly at the award without an employer needing to manually code pay rates(such as the hourly rate at ordinary hours, penalty rates and allowances) into software. Award interpretation
services — such as PaidRight and Tanda — claim that their tools can calculate new pay rates following anaward variation, for example following the FWC’s Annual Wage Review. Such services tend to focus on
high-coverage awards, particularly those in the retail and hospitality sectors. Award regtech can also be used to
identify where employees have potentially been paid below the minimum wages specified in awards.
To date, award regtech has mainly been developed by private sector payroll software providers. However,
government can still play a role in supporting award regtech, including to improve the existing public FWC
and FWO tools and calculators that help users navigate awards. For instance, the FWC has developed theModern Awards Pay Database API (an ‘application programming interface’), which is a mechanism thatallows software developers to directly extract values for the minimum rates of pay, allowances, overtime andpenalty rates in an automated manner, rather than having to manually update payment values coded insoftware following the annual wage review or other changes to award minimum wages.

55 The loaded rate arrangement includes a straightforward consultation arrangement as spelt out by the Fair Work

Ombudsman (FWO 2021).
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Further development of award regtech solutions would benefit from continued collaboration between
government, developers, and award users. As an example, during the development of the Modern Awards
Pay Database API, the FWC consulted digital service providers on the technical design of the API andgathered information on how the API could be used in practice by digital service providers (dspanz, sub. 18,
p. 2). Digital service providers were also able to test the Modern Awards Pay Database API before the API
was publicly released.
For the FWC, award regtech could improve the award drafting process through analysing the effects ofproposed pay-related award determinations on different stakeholder groups, aiding the process ofconsidering effects on the modern awards objective and minimum wages objective. Award regtech could
also help identify potential ambiguities in award content. In the longer term, the Australian Government willplay a central role in exploring the feasibility of using software code to represent awards (‘Rules as Code’),which could improve the process of handing down award determinations by quantifying potential outcomes
and improving the drafting of awards.

Exploring the feasibility of applying a Rules as Code approach to awards
Rules as Code is a label applying to various government initiatives that involve the coding or marking up oflegislation during drafting, with the aim of improving drafting processes and how legislation is provided indigital formats (Waddington 2020). Despite misperceptions, Rules as Code does not typically involve or referto the use of AI to create or interpret law.
Various examples of Rules as Code exist outside of awards. For instance, the coded rules for the NSW
Energy Security Safeguard allow policymakers to visualise the relationships between different parts of thelegislation and to simulate policy scenarios using an interactive dashboard (Harinath, Ipsen andParameswaran 2021).
In the awards space, a Rules as Code approach could potentially involve:• using coded rules to quantify the effect on different stakeholders of creating, varying or revoking an award
before an award determination is handed down
• using coded rules to model the working patterns of employees to determine whether an EA makes
employees are better off overall compared with awards (the Hon Reg Hamilton, sub. 50, p. 26). In thisrespect, coded rules and the software that uses them could also be used to facilitate the inclusion ofreconciliation clauses in EAs. A reconciliation clause allows an employer to top up payments to any
employee who, over some period of time, is subsequently found to be worse off than under the relevant
award.56 Absent such a clause, the FWC may refuse to approve an agreement because it might fail the
BOOT under future working arrangements, reducing the flexibility of agreements (Townsend 2021).57
However, the calculations required for reconciliation are complex. Coded rules lower compliance costs
and provide greater certainty to employees, their representatives, employers and the FWC and FWO thatreconciliation clauses are being used accurately

56 For example, clause 41 of the Commonwealth Bank Group Enterprise Agreement 2020 sets out the detailed factorsthat provides top-up payments if the employee was found ex post not to be better off compared with the award.
57 The exact specification of a reconciliation clause, if present, will be important in determining whether an agreement
passes the BOOT. For example, in [2017] FWCFB 1664, the Full Bench did not find the reconciliation clause in theemployer’s undertaking sufficient to pass the BOOT. The reason was that the FWC found that the undertaking did ‘notcreate an enforceable right to any payment’, because it placed the onus on the employee to request a review of theirwages compared with the report. If an employee did not make a request, ‘whether through ignorance or design, or
perhaps because an affected employee simply lacks the time, information or ability to form a view, then no obligation to
conduct a review, much less “make good” any shortfall, arises [in the agreement]’.
108Effective workplace relations• using coded rules to identify legal ambiguities or uncertainties in award content. The process of converting
awards to code may highlight ambiguities in the written text, which can be remedied by drafters.
Simulations of the effects of proposed award variations may also identify unintended outcomes• publishing machine-readable rules, which payroll software could read to automate calculation of employee
entitlements after an employer inputs work characteristics such as the number of hours worked and thetiming of shifts. There are existing award interpretation services offered by the private sector that cancalculate pay owed to employees who are paid exactly award rates, but some services may be limited tohigh coverage awards, such as awards used in the retail and hospitality sector.
The complexity of Australia’s awards system means that determining the feasibility of a Rules as Code approach(or limitations thereof) is not straightforward. Feasibility is unlikely to be clear until other areas of regtech tools and
API development by the Australian Government are more advanced. However, the potential for regtech to
improve compliance and reduce compliance costs suggest that this should remain an area of priority.
As award regtech becomes more advanced, risk management and quality assurance procedures become
increasingly important. Given the automated nature of regtech, small errors in code can compound into‘systematically erroneous outcomes’ (Colaert 2018). Parties involved in the regtech chain — for example, thedevelopers of the software solutions and the governments that provided APIs and other information — havesome level of control over compliance outcomes and, ideally, would have appropriately strong incentives toimprove those outcomes.

Award regtech and a safe harbour
Some stakeholders have proposed that the establishment of a ‘safe harbour’ would encourage the take-up ofaward regtech and reduce compliance costs (Ai Group, sub. IR179, p. 13). Business users cannot be
assured that, commercial reputation aside, software makers have complete incentives to avoid errors. In
many instances, the terms of use for accounting software and award interpretation services impose limits on
when the software company may be found liable, include indemnity clauses for software errors, and impose
a monetary cap on liability — often the sum of subscription fees paid by the user in the past 12 months.
Under a safe harbour proposal, employers who relied on regtech solutions that calculated wages underaward conditions and later found that the software had incorrectly calculated employee payments could
avoid legal penalties for non-compliance, providing them with regulatory certainty.
On the other hand, a safe harbour would reduce incentives for employers to proactively check their own
compliance. Accordingly, to avert risks to employees of underpayment or a reduction in conditions, thelikelihood of coding errors and inaccurate interpretations of the award would need to be very low for any
regtech product.
In evaluating the potential use of a safe harbour, it is important to consider that errors may occur in various
parts of the payment process. The end user could be the source of error, say, if the incorrect number ofhours were entered, or if an employee were classified under the incorrect award, or if the incorrectclassification grade within an award were used.
If a safe harbour were to be introduced, the Australian Government would need to communicate effectively
to businesses to avoid misconceptions about the scope of the safe harbour. Moreover, any safe harbour
would still need to maintain incentives for software developers to take care in their coding and some level ofprudent oversight by employers of their payroll systems to ensure integrity in data entry and to check for
manifest errors in outcomes. There would also be a need to avoid the risks that a few employers may
strategically use errors to underpay employees. Overall, any safe harbour requires an even greater
confidence that regtech solutions are highly accurate (finding 7.5).

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Making awards easier to understand
Other channels that can help employers and employees better understand their obligations and rights underawards (but do not involve modifying the legal meaning of award content) include education and advice
initiatives and improving the presentation, design and wording of awards.
For example, the FWO operates the Employer Advisory Service program, which provides free personalised
advice to small businesses about how to meet their award obligations. The FWC is undertaking a plain
language redrafting program, where existing modern awards are redrafted using plain language principles.
Such programs are particularly valuable for industries where awards have high coverage; where awards are
relatively complex; or where the users are predominantly small businesses. Industry associations andworkplace relations consultants also play a major role in assisting businesses navigate the WR system.

Plain language award redrafting
Employers and employees should not require legal training to use and understand awards. In establishing
the plain language redrafting program — involving a redraft of selected modern awards — a Full Bench of
the FWC stated that:[a]n award should be able to be read by an employer or employee without needing a history
lesson or paid advocate to interpret how it is to apply in the workplace. (FWC 2016, p. 5)
Plain language makes an award easier to understand but without altering the legal effect of text (FWC 2022).
The process also involves input from unions and employer groups on proposed changes to wording — sothat stakeholders can raise possible changes in legal meaning from the updated text and can comment on
the practicality of the proposed wording.
The redrafting process has applied to both individual awards and to terms that are common to several
awards. As of January 2023, the FWC is examining standard clauses, references to loading or penalties,
reasonable overtime, annual leave shutdown and the National Training Wage, having completed plain
language redrafting for a number of awards with high coverage.58
Principles that are used to draft plain language awards include discussing only one topic within a clause,using shorter words and sentences, making clear obligations by using ‘must’ rather than ‘shall’ and avoiding
archaic language and excessively long paragraphs. To preserve legal meaning, some complex language
may be preserved if there is no codified definition or ‘common understanding’ of a term (FWC 2015, p. 1).59
Alongside simplifying language and clauses, redrafting can also involve improving the award presentation bychanging the structure and design of awards so that users can more easily find information that is required.
For example, the guidelines suggest that awards should avoid subparagraphs where possible, which areperceived as being ‘overly legalistic’ by award users (FWC 2016, p. 14).
Plain language drafting will also aid the development of award regtech. Awards that are easier to understandand do not sacrifice legal precision can reduce the cognitive effort required to translate award content intomachine-readable rules. To successfully translate award content into code for award interpretation softwareor to create machine-readable rules, software developers will need to understand the legal definition of a

58 Awards that have already undergone redrafting include the Cleaning Services Award 2020, Clerks – Private Sector

Award 2020, General Retail Industry Award 2020, Hospitality Industry (General) Award 2020, Pharmacy Industry Award
2020, Restaurant Industry Award 2020, Security Services Industry Award 2020, the Fast Food Industry Award 2020 andthe Hair and Beauty Industry Award 2020, which have high coverage (FWC 2022).
59 A list of plain language principles can be found in FWC (2015, p. 23).
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term — which may be different from a colloquial understanding — and to understand how terms relate to one
another. (Box 4.3 shows an example of code conversion.)
The process of translating awards into code will also involve resolving possible legal ambiguities, either byconsulting with legal specialists or by raising ambiguities with the FWC, which can vary awards ‘to remove
ambiguity or uncertainty or [to] correct error’. For example, Tanda, a company providing award
interpretation software, has applied to the FWC to clarify the treatment of leave and absence hours in the
Clerks — Private Sector Award 2020, although their interpretation has been disputed by the AustralianChamber of Commerce and Industry (ACCI), Australian Council of Trade Unions (ACTU), the AustralianServices Union (ASU) and Ai Group. 60

Box 4.3 – Case study: Rules as Code for vacation pay entitlements as prescribed in
Canadian labour legislation
As a proof of concept, the Canada School of Public Service created a set of ‘coded rules’ using
sections 12 and 13 of the Canada Labour Standard Regulations, which determine vacation pay
entitlements. The coded rules could then be integrated into apps, such as creating an online tool to
calculate the amount owed to an employee after answering a set of questions.
To create a coded version of the legislation, the team needed to identify the legal definition of key terms(such as ‘length of service’), the relationship between terms (such as ‘employee’ and ‘medical pay’) and
importantly, to clarify any uncertainties in language that were encountered (McNaughton 2020, pp. 6–8).
A decision tree was also used to visualise how variables interacted in the legislation to obtain the final
output, which was the total vacation pay entitlement accrued to an employee.
A prototype tool was then created using the coded rules, where the total payable amount (if applicable)
could be calculated after answering a number of questions — including when the employee started, their
total annual compensation and whether the employee had taken medical leave.
Source: McNaughton (2020).

Finding 7.4
Further progress is needed in helping businesses comply with awards
In addition to award simplification, it will be important for the Australian Government to continue to pursue
avenues to help businesses comply with awards through the provision of specific advice, information andother increasingly sophisticated tools.

60 AM2022/8, Transcript of Proceedings 11 July 2022 and Ai Group (2022a)

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Finding 7.5
A ‘safe harbour’ for award compliance has implementation hurdles
The introduction of ‘safe harbour’ provisions associated with awards regtech (regulatory technology) is
likely to be problematic unless award interpretation technology is significantly more advanced. Any safe
harbour proposals would need to be:• effectively communicated to businesses to avoid misconceptions about the scope of the safe harbour• carefully designed to maintain strong incentives for software providers to develop accurate solutions
and for employers to still have prudent oversight over their payroll systems, while avoiding the risks thata few employers may strategically use errors to underpay employees.

4.3

More efficient enterprise bargaining

When operating efficiently, enterprise bargaining allows employers and employees to vary wages andworking conditions from those set out in the relevant awards to best suit their circumstances. While
Australian evidence is scarce, international evidence suggests that enterprise-level bargaining (as opposed
to more centralised forms of bargaining) is associated with higher productivity growth by allowing employers
and employees to mutually benefit from the flexibility in the use of labour, and by improving matching of
employers with employees.61 A well-designed enterprise bargaining system could improve the productivity
and efficiency of businesses and translate to higher wages for employees — the intent of such bargaining
arrangements when they first commenced.
However, with many significant changes since first introduced and in its current form and economic environment,
enterprise bargaining does not seem to be delivering its intended outcomes. Its coverage of employees has
declined (figure 4.1), particularly in the private sector. Wage and productivity growth has been slow.
In the ideal world, agreements are co-operative — securing benefits for employees and employers. If
workplace relations law or the economic context changes, one party or the other may secure most of thegains, or the gains that might otherwise be attainable are no longer on the table because they are notallowed or the transaction costs of achieving them are too high. One party has claimed:… a significant driver is the reality that, in most workplaces, enterprise bargaining is simply not
worth the effort. Enterprise agreements generally do not deliver the much vaunted efficiencies or
productivity benefits … (de Flamingh and Ellery 2022)
61 While the empirical evidence principally relates to Europe, where regulatory arrangements for workplace relations vary from

Australia, it still suggests that moving away from prescriptive models encourages productivity. Analysis from the OECD showsthat economies with a high coverage of centralised bargaining systems have lower productivity growth when compared witheconomies with decentralised firm-level bargaining systems (OECD 2019, p. 3), noting that many other OECD economies havesignificantly more centralised bargaining arrangements than Australia. This is supported by firm-level empirical researchshowing higher productivity gains are achieved by firms that engage in firm-level bargaining than those that rely on sector-wideor centralised bargaining (Garnero, Rycx and Terraz 2018, p. 1). Firm-level productivity was found to increase in more
decentralised multi-level bargaining structures of Europe by leading to a better matching of employers and employees thanpossible under a centralised bargaining structure (Aglio and di Mauro 2020, pp. 17–18). The increased matching of employers
and employees may be facilitated by firm-level bargaining by allowing firms greater opportunity to pass on productivity gains
into wages than is possible under a centralised system as firms are able to set wages relative to their own productivity rather
than industry-wide productivity levels (Criscuolo et al. 2021b, p. 25).
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There are debates about the sources of these weakened incentives.
Some, particularly on the union side, suggest the decline is due to lower union representation, the power of
employers to refuse to bargain, the circumvention of the system through surface bargaining62 and restrictions
on permissible matters in agreements, among other factors (ACTU 2022b, p. 45; Pennington 2020; Stanford,
Macdonald and Raynes 2022, p. 13; Stewart, Stanford and Hardy 2022, p. 5).
Others, particularly on the employer side, point to the increasing complexity, the application of the BOOT,
delays in the agreement approval and bargaining processes and an inability for the system to provide
meaningful productivity-enhancing outcomes (Ai Group sub. IR179, p.9; Business Council of Australia sub.
IR181, pp. 14–15; de Flamingh and Ellery 2022).
These factors cannot have significantly influenced agreement making by the smallest businesses — thosewith less than 50 employees — because they have a relatively low propensity to have agreements in the firstplace (figure 4.3), and the share of employees covered has fallen only slightly (by 0.7%pts between 2012
and 2021).63 Agreement coverage has fallen most for employees in larger businesses, particularly thosesized between 50 and 1000 employees (by 13%pts between 2012 and 2021).
Complexity is likely to play one role in frustrating enterprise bargaining for these businesses and, where
feasible, should be reduced. On the other hand, it is not clear that complexity has been the decisive factor
behind the decline of enterprise bargaining as its high level of complexity pre-dated the decline. Indeed,
there has been some simplification. Changes to the FW Act in 2018 to allow the FWC to overlook minor
procedural or technical errors in enterprise bargaining processes when approving an EA.64 Moreover, themedian approval time for agreements without undertakings has fallen from 30 days in 2018-19 to 14 days in
2020-21.65 The efficacy of the FWC’s outreach can also be seen in the fall in the share of approved
agreements that require undertakings,66 which are amendments required by the FWC to ensure the EA
meets the requirements of the FW Act.
Nevertheless, the provisions of the law remain complex, and bargaining is still time consuming and resource
intensive for parties.67 This is notwithstanding the fact that the objectives clause for enterprise bargaining in
the FW Act indicates that the framework for collective bargaining should be ‘simple, flexible and fair’ (s.171).
Overall, there is no obvious single explanation for the decline of employees covered by agreements among
medium and larger businesses — it will likely be a range of the obstacles identified by stakeholders. In any
case, even had coverage by EA not fallen, a key question is whether they deliver much when they exist.
Many employers and employees will continue to form agreements because they have had them before.
About 70–80% of new agreements made each quarter replace an existing agreement, which has increased
62 A strategy where one of the parties goes through the motions, with no intention of reaching an agreement.
63 Based on data on non-managerial employees from the ABS Survey of Employee Earnings and Hours.
64 Fair Work Amendment (Repeal of 4 Yearly Reviews and Other Measures) Act 2018 (Cth).
65 Many of the delays in approving EAs occur when the applications are not complete (not all the required forms and evidence

are submitted) or non-compliant (the agreement process or content does not meet the requirements of the FW Act) (FWC, pers
comms, 13 July 2022). The FWC has increasingly been working with businesses to help them understand the requirements tosubmit agreements that are complete and compliant, which has likely contributed to the fall in approval times.
66 If the FWC has concerns that an EA does not meet the requirements of ss.186 and 187 of the FW Act, it may accept awritten undertaking that addresses this concern as part of the decision to approve the agreement. The share of approved
agreements requiring undertakings fell from 66% in 2017-18 to 44% by 2020-21 based on unpublished data from
DEWR’s Workplace Agreement Database.
67 Changes to bargaining introduced by the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth)are due to commence in the 6 months to early June 2023. It remains unclear how the changes will affect the complexity
and resource intensity of bargaining.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportfrom about 50% of agreements in 2011 (figure 4.3c). Increasingly, employers and employees are leaving
expired EAs in place, with 56% of employees covered by an agreement on an expired EA (figure 4.4). By
their nature, expired EAs cannot include new productivity enhancing clauses, so the scope for them toimprove productivity depends on whether existing clauses leave room for future flexibility.
In other instances, the joint role of unions and senior management may play a role in rolling over an agreement
even if the new agreement offers little additional benefit to any party. There is a strong relationship between
union membership in an industry and the share of employees covered by an agreement, though it is possible
for a non-union agreement to be negotiated. An employment lawyer has described an EA as a ‘cost of doing
business’ and claimed that there is ‘no practical choice but to have an EA because of the industrial relationshipin the sector’ (DeBoos 2022).68 KPMG expressed the view that bargaining processes have increasingly beenused as a risk management exercise with the primary bargaining item being to negotiate pay rises rather thanaddressing the broader goal of how to identify and secure productivity improvements that could underpin fasterwage growth, as was the original intent of the system (2020, p. 6).
Figure 4.3 – Users of enterprise bargaining

70

Share of employees (%)

90
80
70
60
50

40
30
20
10

60

50
40
30
20
10

1000+ employees

100 - 999 employees

Private sector

50 - 99 employees

Individual
arrangement

Enterpriseagreeement

Award
Public sector

20 - 49 employees

00< 20 employees

Share of employees (%)

c. Incumbents
90
80
70
60
50

40
30
20
10
0

2011
2012
2014
2015
2017
2019
2020

b. Large private sector firms

Share of new EAs replacing existing EAs(%)

a. Public sector

Sources: Unpublished TableBuilder data from ABS (Employee Earnings and Hours, Australia, May 2021,
Cat. no. 6306.0); unpublished data from DEWR Workplace Agreement Database.

68 That said, over the past decade there is only a weak relationship between declining union membership rates acrossindustries and the corresponding change in the share of employees covered by EAs (based on ABS surveys of Trade
Union Membership and Employee Earnings and Hours).
114

Effective workplace relations

100
80

60
40
20

Health care and social
assistance assistanceProfessional, scientificand technical services
Administrative andservices
supportservices
supportRental, hiring and realestate services
estate services

Education and training

Accommodation
andAccommodation andfood services
food services

Wholesale trade

All industries

Finance andinsurance
and insurance
services
servicesandadministration
PublicPublic administration
safetyand safety

Transport, postal andwarehousing
warehousing
Arts and recreation
services services

Retail trade

Electricity, gas, water
serviceswasteandserviceswaste
andOther services

MiningInformation
andmedia andInformation media
telecommunications
telecommunications

Construction

0

Manufacturing

Share of employees on an expired EA(%)

Figure 4.4 – Most EA covered employees are on an expired agreement

Sources: ABS (Employee Earnings and Hours, Australia, various issues, Cat. no. 6306.0); Department of Employment
and Workplace Relations (Trends in Federal Enterprise Bargaining – March quarter 2022).

Accordingly, increasing the use of enterprise bargaining will not in itself necessarily lead to better outcomes.
Given the trade-offs between flexibility and the costs of bargaining, some employers and employees may
prefer to rely on either awards or on individual bargaining. However, addressing some of the flaws in theexisting bargaining arrangements could help to secure mutually beneficial bargaining outcomes.

Refocussing bargaining to enable productivity gains
Notwithstanding concerns about the functioning of enterprise bargaining, individual clauses and terms in EAs
can lead to improved workplace practices and productivity gains by increasing flexibility, improving staff
retention and development and increasing service quality and efficiency (as suggested by various casestudies — box 4.4). Data from DEWR’s Workplace Agreement Database also shows that 39% of all EAs
approved since 2011 contained clauses that specifically link policies, procedures and/or practices to
productivity. However, given the concerns expressed by all stakeholders about the state of enterprisebargaining, it is not clear whether these clauses have much substance or have had much impact.

Box 4.4 – Productivity improving clauses
In 2014, the Fair Work Commission undertook case studies on eight EAs to identify how individual
clauses can promote productivity improvements. They identified three broad aspects of agreements that
employers, employees, and their representatives saw as productivity enhancing.
Promoting flexibility
Staff retention was greater where clauses provided employees with the flexibility to decide their hours of workor gave them additional leave entitlements. Increased staff retention can improve productivity by lowering

115Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 4.4 – Productivity improving clauses
recruitment costs and increasing the gains from on-the-job training and experience. Flexibility in hours worked
can also improve relationships between managers and employees, which increases staff performance.
Skill development
Clauses that provided structure and/or resources for skill development — either through training
opportunities or linking skill development to classification level — were associated with productivity
improvements through improvements to both service quality and staff retention.
Incentives and engagement
The Alcoa Australia Rolled Products Yennora Agreement 2013 contained clauses that provided amechanism to engage employees in implementing work practices favourable to innovation and efficiency.
Other agreements used productivity allowances to encourage more efficient practices, while also
enshrining employer-employee consultation into the agreement, which was seen to increase industrial
harmony, lowering time lost to disputation.
Source: Fair Work Commission (2014).

EAs need to be adaptable (or allow workplaces to adapt) to changing technologies, skill types, occupations,and work practices, as well as broader challenges. The shock to working patterns associated with the
COVID-19 pandemic exemplifies the potential need to adapt EAs as economic conditions change. The
pandemic illustrated that large shares of the workforce could work from home effectively, giving themflexibility, cutting commuting times and for many, increasing their productivity (PC 2021b). For manybusinesses, working from home was a necessity imposed by lockdowns and other restrictions, rather than a
new mindset about how to organise their workforces. Many businesses have now adopted some level ofworking from home as a policy, and some types of provision for it are now also included in some EAs. At theend of 2019, about 3% of agreements covering about 20% of employees had some provisions forhome-based work or telework (Ross 2020, p. 7), though the first agreement specifying home-based work or
telework as a right was approved in late 2022.69 The incorporation of work from home policies in EAs may
well grow over time and may motivate a greater interest in using this industrial instrument. Working fromhome can be mutually beneficial for businesses and employees, depending on how it is managed. EAs also
allow for those arrangements to be locked in over the length of the agreement, providing certainty toemployees, and allowing them to make decisions on equipment and infrastructure to increase their ability towork from home without reducing their productivity.
This is just one example. There are many other aspects of EAs where productivity may be lifted by adding,modifying and sometimes removing clauses, ultimately resulting in better outcomes for all — employers andemployees, and ultimately consumers. Ideally, given the shared objective of raising productivity within theworkplace, such changes should develop co-operatively, drawing on the collaborative input of employees,
their representatives and managers.

69 The Western Sydney University Professional Staff Agreement 2022 gives non-academic staff the right to remotely

work two days a week (pro-rata for part-time employees) unless the request is unreasonable and disrupts the work of theunit. Hare and Marin-Guzman (2022) cite it as the first such agreement.
116Effective workplace relations

However, as noted above, the transactions costs of bargaining may be high, or workplace relations law may
incidentally create tensions between the bargaining parties or restrict the areas where they are allowed tobargain. The result is that EA content may forgo productivity and other benefits for the parties. Two sourcesof potential constraints on productivity are the FW Act’s treatment of permitted matters and the application of
the BOOT, as discussed later in this section.

Restrictive enterprise agreement content
Certain clauses can frustrate business recruitment and innovation. Restrictive clauses like this can directly
affect how an employer can backfill positions or temporarily outsource labour to meet the operational needsof the employer (for example, clauses restricting hiring and promotion in container terminal EAs). There arealso clauses that indirectly affect how an employer chooses its capital/labour investment mix, by prohibitingchanges to working arrangements through overly stringent consultation terms. In some cases, restrictive
clauses can become endemic in a particular industry or type of work, and there may be justification for
sector-specific intervention to address them (for example, chapter 9 of the Productivity Commission’s inquiry
into Australia’s Maritime Logistics System) (PC 2022e). More broadly, it may be valuable to provide greater
safeguards against unduly restrictive clauses.

Consultation terms in enterprise agreements
Under the FW Act, EAs must contain a ‘consultation term’ that requires the employer to consult with
employees (and their representatives) about major workplace changes (such as those likely to have asignificant effect on employees) and rostering changes or changes to ordinary hours of work (s.205). Whenan EA does not have a consultation term, a ‘model consultation term’ is applied to the agreement — either
directly through an undertaking when the agreement is assessed by the FWC, or indirectly if a dispute arises
regarding consultation requirements. In cases where an EA contains consultation terms that are laxer than
the requirements of the model term, the FWC then applies the model consultation term to the agreement70 —effectively setting the model consultation term as the lower bound for consultation terms in EAs.
The model consultation term requires employers to consult with employees (and their representatives) in theevent of a definite decision to introduce a major change, or if a proposal to introduce a change to the regularroster or ordinary hours of work. Among other requirements (box 4.5), the term requires employers to consult
as soon as practicable and give prompt and genuine consideration to the concerns of affected employees.
The requirement to have a consultation term is both best practice from a managerial perspective and areasonable expectation from the employees’ perspective. There are clear benefits to genuine consultation in
the face of a major change or roster/ordinary hours changes. It may promote co-operation and better ways ofachieving change in a business’s practices, with benefits for productivity and employees. Accordingly,
workplace relations law should continue to require genuine consultation.

70 “The absence of a consultation term in an agreement, or inclusion of a term that does not meet the requirements in

s.205, means that the agreement is taken to include the model consultation term” Construction, Forestry, Maritime,
Mining and Energy Union v BHP Coal Pty Ltd [2020] FWC 3788, 20 July 2020 at 150.
117

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 4.5 – The model consultation term
The FW Act allows for a model consultation term to apply to an EA in the absence of a consultation termin the agreement itself (s.205). The model consultation term as prescribed in Schedule 2.3 of the Fair
Work Regulations 2009 (Cth) sets out the requirement for employers to consult with affected employees
following a definite decision to introduce a major change (exact details below) or when the employer
proposes to introduce a change to the regular roster or ordinary hours of work.
Consultation for a major change
Employers are required to notify relevant employees (and their representatives) of a definite decision to
introduce a major change to production program, organisation, structure or technology that is likely tohave a significant effect on employees.
A significant effect on employees is defined as one of the following:• the termination of the employment of employees• a major change to the composition, operation or size of the employer’s workforce or to the skills
required of employees• the elimination or diminution of job opportunities (including opportunities for promotion or tenure); or• the alteration of hours of work
• the need to retrain employees• the need to relocate employees to another workplace• the restructuring of jobs.
Once the employer has made a definite decision to introduce the change, they are required to discusswith relevant employees as soon as practicable, including how it will affect employees and any measuresthat the employer is taken to mitigate or avert any adverse effects on employees. The employer must
include, in writing, any relevant information of the change and how it will affect the employees. As aresult of the consultation, employers must give prompt and genuine consideration to any matters raisedby relevant employees.
Consultation for a change to regular rosters or ordinary hours of work
Unlike a major change, employers are required to consult with employees about changes to a regularroster or ordinary hours of work when the employer proposes to make a change. The consultation
requirements are much the same as those for a major change with the exception that employers are
explicitly required to consider views about the impact of the change on employees in relation to theirfamily or caring responsibilities.
Sources: Fair Work Act 2009 (Cth); Fair Work Regulations 2009 (Cth).

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Effective workplace relations

However, more stringent consultation processes are sometimes implemented in the form of a requirement forunion approval71 or majority employee approval72 before a change can be implemented. Just as poor
managerial decisions could result where consultation processes are ignored, productivity can suffer when
consultation clauses give employees and their representatives de facto power to restrict or veto changes tobusiness models that would be more appropriately determined by management.
The NSW Trains case (box 4.6) provides an illustration of the capacity under the FW Act for consultation clauses
in EAs to incidentally limit technological change. While the issue of customer safety was raised as a key concern
by the relevant union (though this was contested by the enterprise), the decision of the Full Bench of the Fair
Work Commission did not rest on this as the relevant matter, but rather the terms of the EA. This could have given
the relevant union the power to veto other changes that had no real or apparent impact on safety.
A further concern about restrictive clauses of the type included in the NSW Trains Enterprise Agreement
2018 is that even if restrictive clauses are ultimately not used to limit innovation and productivity
improvements, giving employees and their representatives the power to do so — and using that as leveragefor pay rises — could reduce business incentives to invest in cost-reducing technologies. Accordingly, ahidden cost of such restrictive clauses stems from missed opportunities to adopt innovations.
Safety is a separate issue, and one where there needs to be checks and balances against managerial
prerogative. Unions play an informal role in safeguarding employees where new productivity-enhancing
technologies or work practices are alleged to pose safety risks to employees or the public, where unions may
be notified of — or identify — such risks. Unions also have a formal, but constrained, investigative role under
the right of entry arrangements of the FW Act and the work health and safety (WHS) legislation and in somejurisdictions and circumstances, must be consulted during the creation of a return-to-work strategy. The
Australian Council of Trade Unions, as the peak body for Australian unionism, also has two Members within
Safe Work Australia (out of a total of 15). However, EAs are not the appropriate mechanism for regulating
safety and the FW Act includes no positive role for such regulations to be included in agreements. Rather,safety breaches are appropriately resolved with the involvement of WHS or industry-specific safety regulators.

Using the model consultation term as the legally enforceable default
Removing the consultation clause requirement from agreements would be a blunt and counterproductive
approach to resolving the problems by consultation clauses in some EAs (PC 2015c, p. 688). A better
approach would be to limit the ability of stringent consultation clauses from having legal effect in any existing (ornew) EA. This could be achieved by using the already present model consultation term as the only legally
enforceable consultation term in EAs. This has the benefit of simplicity and flexibility. As the model consultation
term is defined through regulations rather than legislation, it could be adapted more quickly to meet any
problems associated with consultation processes.

71

Examples of agreements containing clauses that may require union approval in the consultation process include NSW
Trains Enterprise Agreement 2018, ACT Public Sector ACT Fire & Rescue Enterprise Agreement 2020-2024,
Boskalis (Australia) Pty Ltd and The Maritime Union of Australia Division Propelled Dredging Enterprise Agreement 2018
(now terminated), Smit Lamnalco Towage (Australia) Pty Ltd & Maritime Union of Australia Enterprise Agreement 2017
72 Examples of agreements containing clauses which may require employee approval in the consultation process include
BMA Enterprise Agreement 2018, Emergency Services Telecommunications Authority Operational EmployeesEnterprise Agreement 2019, Jfk Interiors Australia Pty Ltd and CFMMEU Manufacturing Division Enterprise Agreement2022-2025, Prima Architectural (VIC) Pty Ltd and CFMMEU Manufacturing Division Enterprise Agreement 2023
119

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 4.6 – Case Study – NSW Trains and the Australian Rail, Tram and Bus Union
The NSW Government announced a procurement contract for new trains for the InterCity fleet in August
2016, with the roll-out intended to begin in 2019 (Gerathy 2016).
One of the technological improvements of the new InterCity fleet was the inclusion of CCTV technology
for monitoring the exterior of the train before the train leaves the platform (Metcalfe Rail Safety Ltd 2020,
p. 3). The new InterCity fleet also included traction interlocking on the cab door, which meant that theoperating model could not be exactly the same as the current model involving a driver and a guard.a In
the current model, the guard is responsible for looking out the cab door to check that passengers haveembarked and disembarked safely and that the train can depart safely (Metcalfe Rail Safety Ltd 2020,
pp. 22–23). At various times, the NSW Government has explored a driver-only operation, and a driverand customer service guard model, where the guard would have a more customer-focused role (van der
Broeke 2016; Metcalfe Rail Safety Ltd 2020, p. 1).
One of the operating models proposed by NSW Trains would require a reclassification of the existingroles, which would involve a 4% salary increase for drivers, but a reduced salary for guards, reflectingthat the technology had reduced the scope of their duties.a NSW Trains stated that the driver-only model
would have had substantial savings, while the savings from the proposed driver and customer service
guard model were ‘only marginal’.b
The Australian Rail, Tram and Bus Industry Union (RTBU) disputed the change in roles and took thematter to the Fair Work Commission, citing Clause 12 in the NSW Trains Enterprise Agreement 2018(‘the Agreement’), which requires the RTBU’s in-principle approval for various changes to theAgreement. The RTBU’s interpretation was that changes to employees’ pay and conditions, including
restructuring, were within the purview of Clause 12.c
While the Deputy President of the Fair Work Commission initially ruled in favour of NSW Trains, thedecision was appealed by the RTBU. The Full Bench ruled that the new role classifications fell within thepurview of Clause 12 of the Agreement, preventing NSW Trains from implementing its proposals in
respect to the new InterCity Fleet without an in-principle agreement with the RTBUd — effectively giving
the RTBU the power to veto changes to the operating model (and any associated efficiency gains) thatstem from the design of the new trains.
The RBTU has cited safety concerns from the design of the new InterCity fleet (McKinney 2020),
although NSW Trains has disputed this (TfNSW 2021). In June 2022, the NSW Government offered toretrofit guard compartments into the new InterCity fleet, in exchange for ceding the right to veto changes
to work practices or technology (Hutchinson 2022). In November 2022, the NSW Government and the
RTBU agreed to modify the InterCity fleet to meet the union’s concerns, with the first trains rolled out
from December 2022 (O’Sullivan 2022).
a. [2020] FWC 4359 at 11. b. [2020] FWC 4359 at 11. c. [2020] FWC 4359 at 31. d. [2021] FWCFB 1113 at 26.
Sources: Fair Work Commission (Australian Rail, Tram and Bus Industry Union v NSW Trains t/a NSW Trainlink[2020] FWC 4359, 26 August 2020, [2021] Australian Rail, Tram and Bus Industry Union v NSW Trains t/a NSW
Trainlink FWCFB 1113, 2 March 2021); RTBU (2022).

An alternative approach would be to include certain types of consultation arrangements in a list of unlawful
terms in agreements. However, such prescriptive lists run into the complexities outlined in previous Productivity
Commission analysis of the best ways of regulating the content of agreements across a wide range of120

Effective workplace relations

agreements and diverse industries (PC 2015c, pp. 676–679). (However, as noted above, in some industries
there are grounds for remedying the systemic use of clauses that limit how management can run theirbusinesses effectively — the maritime industry being an exemplar.)
The model consultation clause requires employers to provide genuine and prompt consideration to the views of
employees when consulting on a major change to work practices, or on changes to rosters and ordinary hours.
The term ‘genuine consideration’ (as used in the model consultation term) is now well-defined in case law as
requiring input from affected employees without providing veto power.73 This would temper impromptu changes
by management that had major effects on employees by providing employees with an avenue to provide
feedback — while removing any need for approval from unions or employees (e.g. the NSW Trains case) for
decisions that reflect managerial prerogative. Further, the exercise of managerial prerogative does not preclude
employers from agreeing to provide additional compensation to employees as a result of enacting a change.74
Making the model term the only legally enforceable consultation term would not preclude bargaining parties
from agreeing to other terms and having them in their EA. However, were there to be a dispute about thisclause, the FWC would only consider the model consultation term, not the term in the EA.
Stipulating that the model consultation term be the only legally enforceable consultation term in EAs would
go some way to further creating mutually beneficial outcomes from bargaining as employers and employee
representatives would likely only agree to a term that is different from the model clause if they felt it would be
beneficial to them.
Model clauses have clarity and simplicity, but sometimes there may be grounds for an enforceable upper
limit in an agreement, depending on the context. There may be situations where employers agree to a
consultation clause that restricts the introduction of technology or innovative work practices, which could still
hamper productivity if the employer abides by the clause, despite it not being legally binding if a disputearose. In these cases, the FWC could be given the power to authorise alternative consultation clauses
and/or replace overly excessive clauses with the model consultation term, subject to it being satisfied thatthe agreement did not undermine managerial prerogative in essential aspects of the business. These issues
warrant investigation not immediate implementation.

73 Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v

QR Limited [2010] FCA 591, 11 June 2010, at 44 and 45; Construction, Forestry, Mining and Energy Union v BHP Coal
Pty Ltd [2016] FCA 1009, 26 August 2016, at 60; Construction, Forestry, Maritime, Mining and Energy Union v BHP Coal
Pty Ltd [2020] FWC 4322, 20 August 2020, at 212.
74 For example, in Construction, Forestry, Maritime, Mining and Energy Union (105N) v Anglo Coal (Capcoal
Management) Pty Ltd [2022] FWC 3043, (8 November 2022) where Anglo Coal had the prerogative to change
employees’ rosters at short notice but still had to provide the agreed allowance of $300 per changed shift.
121Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Recommendation 7.15
Limit restrictive enterprise agreement content
The Australian Government should limit the ability for enterprise agreements to restrict productivity
enhancing changes to technology or workplace practices that are best left to managerial prerogative by:• leaving employers and employee representatives free to develop mutually beneficial consultation
clauses in enterprise agreements, but amending section 205 of the Fair Work Act 2009 (Cth) so that themodel consultation term (as currently prescribed by Schedule 2.3 of the Fair Work Regulations 2009(Cth)) would be the only legally enforceable consultation term in an agreement if there was a dispute• exploring a mechanism that enables the Fair Work Commission to specifically authorise an alternative
enforceable term or limit an excessive term.

Recent changes to the Fair Work Act
The Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth) (‘the 2022 Amendments’)
introduced a suite of changes to the workplace relations system, including significant changes to remove
some restrictions on multi-enterprise bargaining and the BOOT, and providing more powers to the FWC tointervene in protracted bargaining rounds. The full effect on bargaining and the broader economy from the2022 Amendments will only be felt several years from now when most existing agreements have lapsed. On
top of that, many aspects of the 2022 Amendments provide room for interpretation and discretion by the
FWC, which may also require case law to be built up to fully assess the impact of the changes.

Multi-enterprise bargaining
Potentially the most significant of the changes to bargaining stemming from the 2022 Amendments are themeasures taken to increase the availability of multi-enterprise bargaining. Previously, the FW Act allowed
employers to engage in multi-enterprise bargaining if two or more employers agreed to bargain together. All
employers (bar those in the low-paid bargaining stream) needed to have voluntarily participated in themulti-enterprise bargaining process as the FWC was restricted from implementing bargaining orders75 toforce employer participation other than if a low-paid bargaining authorisation was in effect. Employees
participating in these bargaining processes were also unable to undertake protected industrial action. Given
this and the complexity and narrowness of its features, multi-enterprise agreements accounted for just 0.5%
of all current agreements in September 2022 (DEWR 2022).
Multi-enterprise agreements may increase under the 2022 Amendments. They removed many of therestrictions on the single-interest bargaining stream and the supported bargaining stream (previously the
low-paid bargaining stream) and opened up the eligibility requirements into these streams to potentially
include many more employers. Further changes include allowing employees bargaining under these streams
to take protected industrial action, and the new (or enhanced in the case of supported bargaining) ability of
the FWC to make an authorisation that forces employers to participate in multi-enterprise bargaining or be
added to an existing multi-enterprise agreement.

75 Under the FW Act, if a majority of employees wish to pursue an EA and the employer has not yet agreed, an employee

representative can apply for a majority support determination that requires the employer to commence bargaining. If theemployer refuses to participate, the employee representative can seek a bargaining order to require the employer tomeet the good faith bargaining requirements.
122Effective workplace relations

The revamped single-interest bargaining stream has removed limitations on access to multi-enterprisebargaining to, ‘support employers with clearly identifiable common interests to bargain together under asingle interest employer authorisation in certain circumstances’ (Australian Government 2022 p. xiii). The
certain circumstances involve employers that are one of the following:• related employers — those that are engaged in a joint venture, common enterprise or are related bodies
corporate• franchises• common interest employers — those that have identifiable common interests, which may include similar
geographical location, regulatory regime or reasonably comparable operations and business activities.
The supported bargaining stream includes similar requirements for employers with a common interest but isfocussed on low-paid industries where ‘employees and employers who may have difficulty bargaining at thesingle-enterprise level’ (Australian Government 2022 p. xii). The main difference between the supported andsingle-interest streams is that through the supported bargaining stream, the FWC has additional powers toassist parties in coming to an agreement such as third-party arbitration.
Multi-enterprise bargaining may produce some benefits. It could, for example reduce transaction costs forsome smaller enterprises, enabling them to take advantage of any economies of scale in bargaining, sharing
the burden and resource intensity of bargaining across employers. Many small to medium-sized businesses
do not have the internal capacity or prior knowledge to negotiate agreements and navigate the complexitiesof the bargaining system, which is why they rarely form EAs. Overcoming the barriers to entry to agreement
making could enable more employers to draw on existing EAs and rely on the more sophisticated workplace
relations capabilities and resources of larger enterprises to achieve flexibilities and productivity enhancing
clauses, without having to go through the process entirely by themselves.
The new provisions may also improve the overall bargaining position of employees, allowing them to achieve
more favourable conditions and wages (at least in the short run).
Nonetheless, the new multi-enterprise arrangements pose some risks that could constrain productivity
growth and hence the scope for enduring real wage rises over time. As discussed above, the intent ofenterprise bargaining is to develop bespoke agreements that take into account the market context and goalsof a business and gives employers and employees options for ‘win-win’ improvements. Forcing unwilling
employers or employees into multi-enterprise agreements in which they had no bargaining role may limit
these shared productivity and other benefits. This may not just affect individual employers, but employees
too may relinquish beneficial changes in working arrangements or higher wages.76
Given that industrial action is the most important source of leverage for employee bargaining, the overalllevel of industrial disruption may also increase. Stoppages reduce the output and productivity of thebusinesses affected and have flow-on effects through disrupted supply chains. And while cultural attitudes,
institutions and laws that underpinned industry-wide determination of wages and conditions have changed
over time, and the high levels of industrial disputation observed in the 1980s have largely disappeared(PC 2015c, pp. 859–865), these developments occurred in the context of gradual moves towards a more
flexible workplace relations system.
The biggest concern would be if multi-enterprise agreements became industry-wide agreements with therigidities and risks to productivity and competition that these could entail (discussed in volume 3).

76 In principle, businesses could sidestep the inflexibility of multi-enterprise bargaining and negotiate individual flexibility

agreements for relevant employees — but this would likely involve significant transaction costs.
123Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

The 2022 Amendments include some exemptions and other safeguards that constrain protected industrial
action during a multi-enterprise bargaining process and the capacity for the FWC to force unwilling
employers or employees to participate in bargaining (figure 4.5). These relate to:• business size — businesses with less than 20 employees (excluding irregular casual employees) are
exempt from single-interest bargaining orders77• current bargaining experience — any employer that has a current single-enterprise agreement or is currently
engaged in a single-enterprise bargaining process is exempt from forced single-interest authorisations.
• industry — businesses with employees in the general building and construction industry are exempt• previous bargaining experience — an employer with previous experience of effective bargaining with its
employees can be exempted from single-interest bargaining• the public interest — the FWC must consider whether multi-enterprise bargaining is in the public interest,
even where all parties are willingly seeking to bargain together• the requirement to bargain in good faith — this requirement does not require a bargaining representative to
make concessions or to reach agreement on the terms of a proposed EA (as per s.228(2) of the FW Act).
Figure 4.5 – Potential outcomes in the single-interest bargaining stream with anunwilling bargaining partya
Unwilling employer(s)/employees

Exemptions apply?

Yes

Current multi-enterpriseagreement in place?

Outcome

Exempted frombeing forced into
agreement

No

Yes

No

Can be forced onto
an agreement

Required to bargain
but not required tocome to agreementa Exemptions include: employers with less than 20 employees, employers without a common interest, employers with asingle-enterprise agreement in place, employees and employers in the general building and construction industry, employers
and employees with previous experience of effective bargaining, multi-enterprise agreements that fail a public interest test.
Source: Fair Work Legislative Amendments (Secure Jobs, Better Pay) Act 2022 (Cth).

These only partly address concerns about multi-enterprise agreements. While the first three safeguards
unambiguously identify the employers exempted from bargaining orders, the FWC must exercise its
discretion in relation to the other safeguards. Without established case law to draw from in these matters, it is
not possible to judge whether the safeguards have their intended impact.
Moreover, while a bargaining representative is not required to reach an agreement, at the very least,
employers would incur the costs of participating in the process (and even higher costs if industrial action was

77 This makes at least 93.7% of employing businesses exempt as they have less than 20 employees, noting that additional

businesses may also be exempt if they have more than 20 employees, but some are irregular casual employees. (ABS 2022,
Counts of Australian Businesses, Including Entries and Exits, July 2018 – June 2022, Cat. no 8165.0).
124Effective workplace relations

taken). To the extent that participating in bargaining entails significant fixed costs, this could
disproportionately affect medium-sized businesses with fewer resources to devote to compliance. And
ultimately much or all of these costs would be passed on to consumers.

Bargaining efficiency related changes
The 2022 Amendments also changed the BOOT and gave the FWC more powers to intervene during
prolonged bargaining rounds — changes that, in principle, will improve the efficiency of bargaining processes(both single- and multi-enterprise bargaining) and the potential for them to improve productivity.
The amendments make clear that the BOOT is a global assessment, not a ‘line’ by line’ assessment. The
amendments also require the FWC to give primary consideration to common views of bargaining
representatives when applying the BOOT. Together these enhance the capacity for beneficial trade-offs inagreements that amend award conditions. The FWC will also now have the ability to directly amend
proposed EAs that fail the BOOT to make them compliant, avoiding the slowness and complexity associatedwith accepting (negotiated) undertakings by employers.
The 2022 Amendments have also sought to address the uncertainty in previous iterations of the FW Act
about the application of the BOOT to current and prospective employees and to hypothetical working
arrangements that might never realistically be envisaged. The FWC may now only consider patterns or kindsof work, or types of employment, if they are reasonably foreseeable at the test time.78 This overcomes the
far-reaching scope of the previous BOOT in relation to future employees. The new form of the BOOT would
still be likely to avoid the problems apparent in CFMEU v One Key (box 4.7) in which an employer
strategically sought to circumvent the BOOT by forming an agreement that, while meeting the needs ofexisting employees could adversely affect future employees.79 Overall, this change should, at the margin,
increase the attractiveness of enterprise bargaining, particularly for businesses reliant on, or close to, award
conditions, while maintaining the role of the FW Act in avoiding conduct that harms employees.
The provision in the Amendments that give the FWC the capacity to short-circuit prolonged bargaining also could
increase the attractiveness of bargaining. Previously, the FWC had only limited options to intervene. The 2022
Amendments allow bargaining parties that have not successfully reached an agreement within nine months torequest that the FWC resolve any matters on which agreement has not been reached. The FWC is empowered to
do so if there has been a resolved bargaining dispute regarding the disagreement and it is satisfied that there is
no reasonable prospect of an agreement being reached without intervention. The main risk associated with thisapproach is that it might inadvertently lengthen some negotiations if a bargaining party believes that it might get abetter outcome from waiting until nine months has elapsed. Whether this concern materialises should be
examined as part of the proposed review (recommendation 7.16).

78 As an illustration of the change, the explanatory memorandum indicates that an allowance for ‘the holding of a liquor licence andwork in a cool room, despite the enterprise not serving liquor or having a cool room’ would no longer be a relevant matter for theBOOT, as the hypothetical working arrangement would not be reasonably foreseeable (Australian Government 2022 p. 5).
79 The capacity under the 2022 Amendment for the FWC to re-test a previously approved EA against the BOOT should afuture employee prove to be worse off than the award provides additional security for employees while encouraging
employers to look closely at the terms of an agreement that might trigger such a subsequent intervention. The concerns
relating to so-called Zombie agreements, which can preserve conditions well below the award (as occurred in United
Workers' Union v Hot Wok Food Makers Pty Ltd [2022] FWCFB 191, 21 October 2022) will also be addressed, with suchagreements being terminated in December 2023 unless provided an extension by the FWC.
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 4.7 – CFMEU v One Key
In 2015, One Key, a labour hire business, formed an EA with only three employees. The agreement allowed
for variations in 11 modern awards. However, on the day of the vote, no employees fell within the coverage ofmost of those modern awards (Ellery 2017). The EA sought to pass the BOOT by providing an allowance of
0.1% of the hourly base rate of pay in the relevant award, paid on ordinary hours only. For the three relevant
employees, the changes appear to have met the BOOT. The FWC approved the EA.
However, One Key then expanded its staff to more than 1000 employees within six months of the vote,
who may not have been better off. The CFMEU, which was not aware of the agreement prior to it being
struck, applied to the Federal Court of Australia for it to be quashed or declared void (Ellery 2017).
The Federal Court ruled that there was no genuine agreement from employees as One Key did not takereasonable steps to explain the terms and effect of the agreement, and in particular the interaction thatthe agreement would have with the 11 awards that would cover future employees. Moreover, Justice
Flick observed that the business ‘unquestionably’ secured consent to the agreement with the ‘intent’ tosubsequently cover other employees and thereby preclude a genuine bargaining process or any
industrial action during the period of the agreement (para 124 of [2017] FCA 1266).
Consequently, the decision by the Fair Work Commission to approve the agreement was overturned andthe agreement was deemed to be invalid. The case highlights the importance of maintaining checks andbalances in the FW Act to reduce potential gaming by any bargaining party.
Source: Construction, Forestry, Mining and Energy Union v One Key Workforce Pty Ltd [2017] FCA 1266, 8 November 2017.

Issues for examination by the proposed review
The 2022 Amendments include a requirement for a review of the operation of the amendments within two years.
Among other aspects, the review should test the impacts of the amendments on bargaining processes, the trend
in the uptake of EAs and productivity-enhancing provisions in agreements. Similarly, the review will need toassess the overall outcomes of multi-enterprise agreements on the community. Box 4.8 specifies some of thedetailed questions that the Productivity Commission considers should be the central focus of the review. The
review will need to recognise that two years may not be sufficient to test all of the impacts of the amendments,
especially as case law about any contested parts of the legislation may not be fully developed.

Box 4.8 – Considerations for a review of bargaining changes
An effective review of the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth)(‘the 2022 Amendments’) should examine how the changes to bargaining have affected the bargaining
process and its use, the role of the Fair Work Commission (FWC) and the impacts on employers,
employees, wages, productivity and broader economy.
Single-enterprise agreements
The 2022 Amendments seek to encourage single-enterprise agreements (Australian Government 2022b,
p. 5). The review should consider the ease at which bargaining parties are able to create, implement, and126

Effective workplace relations

Box 4.8 – Considerations for a review of bargaining changes
vary (if necessary) single-enterprise agreements to determine if there are complexities that still remainthat need to be addressed further.
Key questions• To what extent have the 2022 Amendments increased the use of current single-enterprise agreements?
• Has there been efficiency improvements in the bargaining process and increased use of
productivity-enhancing clauses?
• If the Amendments have not achieved these outcomes, what have been the obstacles and how canthey be overcome?
Multi-enterprise bargaining
Given the greater scope for multi-enterprise bargaining under the 2022 Amendments, and its potential
economic impacts, the review should examine the uptake of multi-enterprise bargaining and any impacts
on productivity, wages, prices and competition.
Key questions• To what extent have the changes to the single-interest and supported bargaining streams increased
the voluntary use of multi-enterprise agreements?
• Are the exemptions to bargaining orders effective in restricting any negative impacts thatmulti-enterprise bargaining has on productivity, prices and competition or are there grounds for further(or reduced) limitations?
• Is the supported bargaining stream effective in encouraging new participants in the bargaining systemand benefiting low-paid workers?
The role of the Fair Work Commission
Many of the 2022 Amendments provide the FWC with increased powers to make determinations while
also allowing the FWC to exercise discretion when determining the precise limits for exclusions. The
review should examine the effectiveness of the FWC’s decision-making processes and results in light of
their increased power and influence.
Key questions• How has the FWC’s decision making (and resulting body of jurisprudence) aligned with the intent of
the 2022 Amendments and is there a need for more explicit direction in the legislation?
• Has the FWC’s decision making in relation to the 2022 Amendments been consistent across all Members?
• Does the FWC have the appropriate capabilities to assess the potential competition impact ofmulti-enterprise bargaining or is there a need to amend the Competition and Consumer Act 2010 (Cth)to allow the Australian Competition and Consumer Commission to have a role?

127Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

Recommendation 7.16
Review of recent bargaining changes
The review of the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth) should
particularly focus on the:• degree to which it has promoted single-enterprise bargaining and achieved productivity-enhancing
improvements in workplaces• use of multi-enterprise bargaining and its effect on wages, prices, competition, and productivity• potential need for further clarification on elements reliant on the Fair Work Commission’s discretion.

Future directions for bargaining reform
While the 2022 Amendments seek to address some key inefficiencies in the bargaining process, there is still
scope for further reforms to increase the productivity gains from bargaining.

Workplace relations culture
Bargaining between employers, employees and their representatives is more the outcome of the culture ofany business than legislative provisions. To some extent, such cultures can be affected through education —such as the FWC’s Cooperative Workplace program (FWC 2023), but the broader economic and social
environment is also key. That culture is affected by the regulatory environment, but also the willingness ofgovernments, regulators, unions and employer peak bodies to co-operate for changes that promote a
resilient economy and productivity — as evidenced briefly by (ultimately failing) co-operation during the earlystages of the pandemic (Hamilton sub. 50, p. 37, O’Neil 2021).
The key point is that legislative change of the kind proposed in this review is just one ingredient to reform ofenterprise bargaining and of the award system, and can only do so much.

Reforming the relationship between agreements and awards
By explicitly defining the BOOT as a global test, the 2022 Amendments have clarified that an EA passes the
BOOT if a reduction in one benefit in an award is fully compensated by some other new benefit.80
However, the 2022 Amendments do not significantly alter the BOOT. Consequently, it retains many of thecomplexities and problems that have emerged in past FWC decisions relating to its application. In particular,
the BOOT retains the requirement that each and every employee must be better off than the award under aproposed agreement.
On face value, it appears that the test would not necessarily fail if one or a few employees were worse off solong as the class to which such employees belonged were made better off (s.193A(7)).
However, there are two drawbacks to this provision:

80 This report does not consider the application of the BOOT to the individual flexibility provisions of modern awards andagreements, which involve a mix of parallel and unique issues.
128

Effective workplace relations• It only applies if there is no evidence to the contrary. Accordingly, if a few employees, or just one, could
show they were worse off, then the BOOT would fail.81 Passing a BOOT where a few employees areworse off relies on either inaction or ignorance by the relevant employees or their representatives.
• Classes of workers are a slippery concept. In particular, if a given worker is worse off than someone elsein their same class, their working patterns and entitlements must be different. If they are different, thenthat arguably defines them as a separate class, and the BOOT may still fail.82 It is difficult to determine
classes given this, and doing so becomes increasingly difficult for smaller businesses with a wide mix of
employees. The selection of classes requires the agreement to affect each member in the same way suchthat there is likely to be a common BOOT outcome.
As it happens, it probably does not matter much that a BOOT could fail for just one or a few employees (existingor genuinely prospective) because there is an easy remedy by simply changing the relevant EA (in the pastthrough undertakings and following the 2022 Amendments, through unilateral minor modification by the FWC of
the offending features of the agreement). Such a change would not be costly to employers given the small
numbers of relevant employees. Failing the BOOT in this instance is an immaterial and transient nuisance.
Where the application of the BOOT is most harmful is where there is a significant number of employees
made worse off, even when most are not. In these cases, it may not be possible to amend the agreement topass the BOOT without forfeiting the gains to productivity and efficiency that underpinned the initialagreement. In that context, as a group, employees may be worse off and so would the employer.
There is an inconsistency between the requirement that EAs must make employees better off than the award
and the capacity for the FWC to change awards that can make a significant number of employees worse off.
The BOOT takes the award as sacrosanct while the award revision process does not.

Providing flexibility for when the BOOT applies
Through its ‘all in, or none in’ feature, the BOOT lies on one end of a spectrum of arrangements fordetermining the distribution of benefits for employees covered by an agreement. At the other end, were there
no BOOT, the requirement that an agreement lodged with the FWC must be approved by the majority ofvoting employees provides protection against weakening award conditions but would not prevent
disadvantaging a sizeable share of the workforce. There are a range of models lying between these twoends of the spectrum that may be simpler to implement and allow greater scope for productivity-enhancing
flexibilities, while still acting in the interests of most employees.
A middle ground between these two positions would be to expand the circumstances in which the FWC canapprove an agreement that does not satisfy the BOOT. The FW Act (s.189) allows the FWC to approve
agreements that do not pass the BOOT but only if it is in the public interest and there are exceptional

81 A case in point was of an employee in a bakery who could only work on Sundays and so was made worse off, because ofher highly specific working patterns by a new EA that was otherwise generally favourable to its employees. That single
exception was deemed enough to fail the BOOT (Shop, Distributive and Allied Employees Association (006N) v Beechworth
Bakery Employee Co Pty Ltd T/A Beechworth Bakery [2017] FWCFB 1664, 6 April 2017). Similarly, the action that led to thefailure of the BOOT for the Coles Store Team Enterprise Agreement 2014-17 relied on a complaint by one employee, thoughultimately the evidence suggested numerous employees would have been made worse off (Duncan Hart v ColesSupermarkets Australia Pty Ltd and Bi-Lo Pty Limited T/A Coles and Bi Lo [2016] FWCFB 2887, 31 May 2016).
82 In this instance, a class becomes divided into sub-classes which have the same effect in law as a class (BGC
Contracting Pty Ltd [2018] FWC 1466, 12 June 2018, at 221)129

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportcircumstances.83 An expanded criteria should consider the benefits of a proposed EA to employees overall, taking
into account the relative impact on any employees that are made worse off (or are in line with award conditions).
Factors that would be relevant include:• the relative size of the worse-off cohort compared with all employees covered by the agreement• the significance of the disadvantage that the worse-off cohort would experience compared with thebenefits to the better-off employees• the size of the majority approval vote• the wider economic benefits of the agreement• whether the worse-off cohort voted to approve the agreement (as they might if they saw opportunities tochange their patterns of work to benefit from the new agreement, or simply saw them as reasonable)• whether a union(s) was involved as an employee representative and supports the agreement.
A decision to waive the BOOT would leave the FWC to decide on the weight it gives to each element, as
currently occurs when considering changes in awards based on the modern awards objective. This would
include deciding the value of the parameters in the first three criteria that would be relevant to a decision —such as the explicit required size of the majority approval vote (e.g. 90%). This would involve judgment
supported by evidence and a careful assessment of the lessons from economic theory, on top of the lessons
from the accumulation of case law.
Further safeguards could be explored such as allowing post-approval re-testing or re-voting if certain
conditions are met, such as if the majority of employees (or class of employees) covered by an agreement
did not originally vote on the agreement. In these circumstances future employees could have an agreement
directly amended (or terminated) by the FWC to bring conditions back to award level.
When determining the appropriate mechanism to allow the sidestepping of the BOOT, there should be regard towhether undesirable outcomes as identified in CFMEU v One Key (box 4.7) could be repeated. Any new
approach would also need to deal with the complexities that were apparent in Hart v Coles. In that case, Colesand the Shop, Distributive and Allied Employees Association had mutually agreed to higher hourly base rates andlonger meal breaks, among other provisions, in exchange for lower penalty rates (in the Coles Store TeamEnterprise Agreement 2014–17). These changes largely benefitted permanent employees working weekdays but
highly disadvantaged employees working nights and weekends. The provisions of the FW Act made itstraightforward for the FWC reverse its approval of the agreement in 2016.84 A new arrangement would have toweigh up whether the total benefits to permanent employees working weekdays exceeded the losses to other
employees, taking into account the distribution of the losses amongst those affected and their vulnerability.
In the event that this broader approach is not adopted, then alternative options would be to:• define classes that are broader in their characterisation (such that idiosyncratic working patterns within
employee classifications would not constitute their own class). A BOOT would require that the averageoutcomes for broadly agreed classes from a change in an agreement be better off overall• move from a BOOT to a ‘no disadvantage test’, such that a proposed agreement would fail if it
disadvantaged a class of worker compared with the relevant modern award. The difference is slightbecause an obligation to be somewhat better off (say, one cent more per year in wages due to anagreement) is very close to not being disadvantaged (no increase or decrease in wages). Nonetheless the

83 s.189(3) specifies the exceptional circumstances to be where the agreement is part of a reasonable strategy to deal

with a short‑term crisis in, and to assist in the revival of, the enterprise of an employer covered by the agreement.
84 [2016] FWCFB 2887.
130Effective workplace relations

change ‘could be a symbolic difference that may incline FWC members to treat the BOOT as setting aslightly higher bar’ (PC 2015c, p. 695).
Changes to the BOOT to increase flexibility could also make the bargaining system more attractive for thesubset of workplaces whose wages and conditions are largely determined by awards, and could thereby
allow greater scope for productivity and efficiency improvements.

Recommendation 7.17
Disentangle enterprise agreements from awards
The Australian Government should explore methods to further loosen the relationship of enterpriseagreements with awards when there is genuine agreement between employees and employers. Thisshould include an amendment to the Better Off Overall Test such that even if some employees are worse
off from a change in an agreement, the Fair Work Commission could nevertheless approve an agreement
if a range of public and private interest tests were met, including the degree to which the benefits towinners are larger than the losses to losers.
Any changes should have adequate protections in place to avoid undesirable outcomes as exemplified by
the Construction, Forestry, Mining and Energy Union v One Key Workforce Pty Ltd case.

Proposals from stakeholders
The Business Council of Australia (sub. IR181, pp. 14–15) and the Ai Group (sub. IR179, p. 9) both proposed
further reform in the bargaining process by simplifying the requirements on employers to explain the terms of a
proposed agreement as required under section 180(5) of the FW Act. Under this section, employers must take allreasonable steps to explain the terms and the effect of those terms to the relevant employees in an appropriatemanner taking into account their particular circumstances and needs. Following the CFMEU v One Key case(box 4.7), the FWC has placed more scrutiny on the content and method of the explanation given to employers
where previously a signed statement from the employer that an explanation had been given sufficed (Ellery 2017).
This has increased the burden on employers to not only follow the explanation requirements but also to provide
the adequate evidence when applying to the FWC to approve an agreement.
The Business Council of Australia proposed several options to reduce the costs of section 180(5), including only
requiring an employer to explain impacts of a new agreement where they vary from a predecessor agreement andthat approval of an agreement by a registered organisation (typically a union) would suffice as evidence that anagreement had been adequately explained to employees (sub. IR181, pp. 14–15). However, while the various
proposed simplifications would yield some efficiencies, they increase the risks of inadequate communication toemployees and could undermine their capacity for informed voting on any agreement. Notably, as in the case ofHart v Coles, there could also be cases where one employer representative supports an agreement that makes
employees represented by other parties worse off, and without adequate explanation of the terms, the worse-off
employees may be uninformed as to the effect of the proposed agreement.
The issue highlights a more general tension in the design of any element of workplace relations law that thebulk of employers do not seek to circumvent the law, but that a small minority do so. Accordingly, there
needs to be a balance between reducing transaction costs for employers and employees, while having
sufficient clarity in, and enforcement of, obligations to address misconduct by any party to agreements. If thisbalance is not achieved, the willingness of employees to depart from award conditions or past ‘safe’agreements may be undermined, working against the intent of encouraging productivity-enhancing EAs.
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Platform work and the gig economy

5.

Platform work and the gig
economyKey points
Platform business models can benefit consumers and some workers, while contributing to productivity
through new and more efficiently delivered services. Regulatory challenges associated with platformwork should be addressed without unduly constraining its business model.
• Many forms of platform work are not directly comparable with employment relationships. Shoehorning
platform work into other employment categories would put at risk its productivity impacts and its benefits for
gig workers. But improved safety protection and access to dispute resolution are warranted.
The potential for collective bargaining between contract platform workers and platforms is subject tocompetition law (given that independent contractors are considered small businesses). Under current
settings, it is unlikely that such bargaining would occur and result in binding conditions on pay.
• Competition exemptions for collective bargaining are conditional on passing the net public benefit test. It is
unclear whether higher pay rates to workers are legally considered public benefits or detriments.
• Platforms have little incentive to bargain with small groups of contract platform workers; large groups ofcontract platform workers may not pass the net public benefit test needed for a competition exemption.
• As platform workers are paid for what they individually produce, they are incentivised to work at their highest
productivity. They have little to trade away in collective bargaining, as platforms could unilaterally imposechanges to working arrangements, subject to complying with terms in their contracts with platform workers.
For some platforms, current internal dispute resolution mechanisms appear to be opaque and lack due
process. There is no effective external avenue for low-cost dispute resolution.
• Ineffective resolution arrangements may result in high turnover and poor outcomes for workers. Platformworkers face difficulties in resolving disputes because of uneven bargaining power and may face high legal
costs when attempting to pursue court-based remedies. Giving the Fair Work Commission the capacity for
resolving significant disputes would provide a last recourse option to protect platform workers.
• Consumer confidence in platforms also relies on assurance that platform operators can manage poor quality
service by platform workers.
Some platform work incurs significant risks to worker and public safety. Insurance arrangements varyand in some cases, appear to be lacking.
• Where insurance is lacking, the policy response will depend on the extent of risk, feasibility of implementationand the ability to design a financially sustainable scheme.

133Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

5.1

Introduction

One of the key labour market developments since the Productivity Commission’s Inquiry on the Workplace
Relations Framework (PC 2015c) and Shifting the Dial (PC 2017b) has been the growth of platform work —also known as on-demand work, gig work or work conducted as part of the gig economy.
While ridesharing and food delivery platforms (e.g. Uber, DiDi and Menulog) are among the most well-known
examples, platform work in Australia now spans many industries, including clerical and data entry, creativeand multimedia, health care, sales and marketing, software development and professional services(McDonald et al. 2019, p. 38). Within transport — the pioneer sector for platform work — there have beenfurther inroads into package delivery and freight services, such as Amazon Flex and Uber Freight (the latternot yet operating in Australia), as well as small goods delivery.
There is a dearth of publicly available data on platform work generally (box 5.1) including on the number ofplatform workers in the labour market (and given the rapid evolution of this type of work, statistics age quickly).
Estimates from 2019 suggested that about 250 000 people were working at least part time in this part of thelabour market (Freudenstein and Duane 2020, p. 11). While this is relatively small, this number represents a
tripling in the size of the workforce since 2015 and would have made the ‘gig economy’ a bigger employer thanthe mining sector at the time, although many people in the ‘gig economy’ would not work comparable hours.
While platform work involves some challenges for workplace relations policy (section 5.3), it promises
significant productivity and other efficiency benefits from better matching between consumers, greater
flexibility, higher quality on-demand services and gains in efficiency from more competition between firms(section 5.2). Although there are legitimate concerns about some aspects of platform work, the policy
response should not seek to classify all platform workers as employees and risk reducing key productivity
benefits, including labour flexibility. Rather, a proportionate approach to addressing genuine issues inplatform work would focus on addressing issues including:• internal and external dispute resolution processes (as relates to suspensions, terminations andnon-payment for work) (section 5.4)
• safety issues and insurance arrangements (section 5.5).

What is platform work?
There is no standard definition of platform work, or what the ‘on-demand’ economy comprises. Many
definitions emphasise the exchange of labour where producers and consumers are matched using a digitalplatform — a website or app — and where payments are generally incurred per task.85 For example, theABS defines digital platform work as:
the provision of fixed duration labour services, in the form of tasks/jobs which are accessed by theworker through digital platforms and are paid per unit of work delivered through the same
platform. (ABS 2022e, p. 4)

85 This chapter explicitly excludes digital platforms or digital marketplaces in which users sell or rent goods to consumers(e.g. AirBnB, Facebook Marketplace and Gumtree) and is distinct from the ACCC’s use of the term ‘digital platform’ torefer to internet search engines, social media services, online private messaging services, digital content aggregation
platform services and some electronic marketplace services.
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Platform work and the gig economy

Box 5.1 – Public data sources on platform work
Publicly available information on platform work is generally irregular, ad hoc and of variable quality.
Some data is not directly comparable, as different definitions of when a worker is ‘working’ are used —such as the cumulative time a worker is actively completing a task (‘engaged time’) or to also include thetime when a worker is logged in, searching for work — such as in ridesharing or food delivery — but has
not found a task yet.
There would be value in more regular collection of detailed data on platform worker outcomes alongsideother labour statistics and work health and safety outcomes, especially as the relevance of existing data
quickly ages. The ABS has developed a new survey module on digital platform work and workers to be
run from July 2022, with initial data expected to be published in the second half of 2023 (ABS, pers
comms, 5 September 2022). The ABS also publishes the Work-Related Injuries Survey every four years,
covering all workers, though has high sampling errors (Safe Work Australia 2021a, pp. 39–40). Safe
Work Australia (pers comms, 12 Dec 2022) also collects data on platform delivery drivers who were
fatally-injured at work.
Aside from information published by interested parties, the main source of information about platformwork is a 2019 national survey commissioned for the Inquiry into the Victorian On-Demand Workforce(IRV 2020, p. 31), though published results exclude some important dimensions of platform work, suchas distribution of hours worked and demographics.
The Household Income and Labour Dynamics in Australia (HILDA) survey has also included information
about platform work, starting from 2020, though its reliability is limited by the underrepresentation of recent
migrants in the survey’s sample and by sample size (Melbourne Institute 2021). Survey responses to platformwork are also incomparable with other labour market questions because of a mismatch in reference periods.
In the future, transaction data provided to the ATO will allow the size of the gig economy to be bettermeasured. Following the Treasury Laws Amendment (2022 Measures No. 2) Act 2022 (Cth), some
platforms will be required to directly report platform worker payments to the ATO for data matching.
Required reporting begins on 1 July 2023 for ridesharing and short-term accommodation and on 1 July2024 for all other reportable transactions.
Other sources include submissions, public hearings and responses to questions on notice relating tovarious government inquiries about platform work, including those held by the Senate, NSW Senate andthe Victorian Government.
The United Nations Economic Commission for Europe defines ‘digital platform employment’ as:… employment performed through an online tool or an app that matches supply and demand for
employment, strongly based on an algorithm. An important aspect to consider in this context isthat digital platform employment is about the assignment of individual tasks (smaller or larger),rather than about jobs. Although many platforms treat workers as independent workers, all statusin employment categories are potentially relevant to digital platform employment, andclassification depends on the nature of economic risk and authority experienced by workers in
relation to the platform. (UNECE 2022, p. 40)
Most platform workers are classified as independent contractors (employer-employee models of platformwork are rare). Many types of platform work are, in essence, a digitalised version of existing contracting

135Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportwork. Contract platform work is characterised by the sharing of commercial risk and the absence of
employee entitlements (for example, a minimum pay rate, paid or unpaid leave and workers compensation),
although some platforms provide personal injury and public liability insurance.
Some submissions have highlighted the distinction between ‘horizontal’ and ‘vertical’ platforms (Mable,sub. IR152, p. 1; Per Capita, sub. IR162, p. 7). Horizontal platforms provide a marketplace where workers
and clients can negotiate on the nature of work, pay rate and where the platform is not directly involved inallocating work to workers (IRV 2022, pp. 9–10). In contrast, vertical platforms directly allocate workers toclients and may set the price (paid by consumers) and pay rate (paid to workers) for services.
Some forms of platform work are characterised by greater platform control over how a service is performed,
such as the possibility of account suspension or termination for having a low rating and or by adjusting
service fees based on a worker’s level of performance.86

Finding 7.6
Digital platforms appear to be expanding quickly, but data is limited
Platform work is rapidly expanding, but poorly defined. There is a lack of publicly available data on thesize of the digital platform workforce and the characteristics of its workers. What statistics are available
have limitations — including small sample sizes, being from interested parties that do not provide theunderlying data or both. The lack of data is an impediment to definitive conclusions about the sector.

5.2

The upsides of platform work

Platform work can enhance productivity through several channels, including better matching, improved
consumer choice and more competition between platforms (and traditional businesses) that improve thequality and variety of available services.

Better matching
By reducing search and other transaction costs, the use of the platform technology itself (including
algorithms and real-time price signals) has allowed for better matching between suppliers and consumers.
Competition from businesses based solely on platform technology has led to diffusion of digital technologies
into more traditional businesses: technology used in rideshare and food delivery platforms (matchingcustomers with nearby drivers) are now used in apps in the taxi industry. For instance, instead of searchingfor an available taxi on a street or telephoning a taxi booking service, apps now allow people to ‘virtually’ haila ride and time their walk to the curb to match the arrival of the vehicle with the help of GPS tracking,improving the user experience. Real-time price signals — commonly referred to as surge pricing or

86 The performance thresholds that lead to account suspension or termination can be opaque and vary between

platforms. That said, Uber states that having a low aggregate rating may lead to removal of access from some or all of
the Uber platform (Uber 2022d). DiDi states that a low passenger/user rating, high cancellation rate or low completion or
acceptance rate may lead to suspension or permanent deactivation (DiDi Australia 2021). DiDi also states that somedrivers may be subject to a lower services fee, based on acceptance rate, completion rate and other factors within agiven measurement week (DiDi Australia 2022).
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Platform work and the gig economy

demand-responsive pricing — are a common feature of ridesharing and are designed to induce a greaterlabour supply response to increase the number of drivers (and rides) available.

Greater flexibility and choice for workers
Digital platforms often have lower barriers to entry and exit than traditional employment models, with workers
being able to join and leave the platform without traditional hiring processes or (generally) without restrictions
on the number of people that can offer their services on the platform. Workers can supply labour without ahiring and rostering process, often bringing their own equipment. For instance, many rideshare drivers use theirown car, although some drivers enter into financing or rental agreements specifically to work in ridesharing.
The platform model has facilitated the entrance of many additional suppliers in markets such as urban
transport, providing greater consumer choice. In particular, Uber has rapidly increased its patronage
compared with taxi services (Roy Morgan 2019). Uber itself is now facing stiffer competition from rivals likeOla and DiDi (Roy Morgan 2020). The competitive pressures are greater than might seem apparent by justconsidering the number of platforms because platform workers on the same platform compete with eachother. The overall growth of non-employing businesses offering taxi and other road transport services, which
will include many rideshare drivers, provides a rough measure of rising competitive pressures (figure 5.1).87
In ridesharing, labour flexibility has allowed platforms to address labour shortages and improve worker
retention by giving workers time-limited bonuses or temporarily higher pay rates (Rana 2021).
There is variation in each platform’s level of control over its workers. Many platforms offer workers theflexibility to choose when they work, allowing them to choose the day of the week, time of day, and durationof their shifts, often only setting maximum shift hours for safety reasons. In practice, workers often only work
during times of high demand (e.g. food delivery) as the effective hourly rate is otherwise low or are
encouraged to be provide services during peak times (e.g. surge pricing). Some platforms may require
workers to accept work in ‘blocks’ of hours. There are also platforms that operate solely as a conduit
between the consumer and the worker, allowing the two parties to organise the time and duration of workwithout the platform’s input.88
Digital platforms offer workers more flexibility in how they provide their services compared with traditional
employee-employer relationships. Some platforms allow workers to choose for themselves or negotiate with
consumers on how to complete tasks. Platforms tend not to restrict workers from providing services on otherplatforms, even for competing platforms. However, some platforms may use the acceptance rate of tasks orother inputs as a method of allocating work through algorithms. The nature of platform work in ridesharing
and food delivery (involving down time between customers) lends itself to ‘multi-apping’ where a digitalplatform worker can offer services and sometimes perform tasks in two or more competing apps at the sametime. For instance, a food delivery worker may accept tasks on more than one platform, have multipledeliveries along a route, or both.

87

Although a large number of contractors working for the same vertical platform might not compete with each other in thesame way a large number of small businesses normally would.
88 As platform work operates on a task-by-task basis, most platforms only provide payment to workers at a piece rate via theplatform after the task is complete. Some apps have a set rate per task that workers earn based on the pre-determined price ofthe service to the consumer, while others allow workers to negotiate with the consumer on their price and thus their fee or to
respond directly to a consumer’s offer. Digital platforms then collect either a share of the consumer price or an additional fee on
top of the consumer price. In some cases, the consumer of services is the platform, such as in Amazon Flex, where workers
deliver packages for Amazon, and FedEx’s proposed platform for delivery (Marin-Guzman 2022).
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The low barriers to entry for workers in some forms of platform work can benefit people who find it difficult toaccess the formal labour market. About 60% of Uber Eats delivery workers found it difficult to obtain jobs as
employees (Accenture 2021, p. 12).
Some workers rely on platform work as their main source of income or find that such income is important.
About 78% of rideshare drivers and 86% of food delivery platform workers who responded to a Transport
Workers’ Union (TWU) say that platform work was their main source of income (TWU 2021, p. 10,14), while
57% of Uber Eats delivery workers say that income derived from Uber Eats work was ‘essential to them’(Accenture 2021, p. 11). Of course, dependence on platform income need not align with community norms
about appropriate wages if a platform worker has no or few outside options.
Figure 5.1 – The number of taxi and other road transport businesses grew significantly
from 2014 until COVID-19a
Percentage change in the number of non-employing businesses
50
Taxi and other road transport
40
30
%
20
10

All other non-employing businesses

0
-10
-20
2007-08

2009-10

2011-122013-142015-162017-18

2019-202021-22a. Most transport platform workers are engaged on an independent contractor basis and as such require an AustralianBusiness Number. As such, the significant increase in the number of taxi and other road transport businesses since 2014is likely to be a reflection in the growth of platform work.
Source: ABS (Counts of Australian Businesses, Including Entries and Exits, various issues, Cat. no. 8165.0).

Higher quality services
Some digital platforms have underpinned greater consumer empowerment, improving the quality of service. In
aged and disability care, platforms allow people to choose individual carers. This reduces people’s search costs infinding carers that meet their preferences and that understand their care requirements, without the need to
re-familiarise with a new carer. For instance, Hireup — which engages workers as employees — states that on
average, the length of a care relationship via the Hireup platform spans 12 months (Hireup 2021, p. 10).

More competition
Platforms have enhanced competition and encouraged competitors to explore different pricing models andstructures to attract consumers with different preferences in growing markets (table 5.1). In ridesharing,138

Platform work and the gig economy

real-time fares are typically set by a platform in response to consumer demand, driver supply and to
maximise profit. However, some rideshare platforms have departed from such pricing models and some taxi
networks use their lack of surge pricing as a product differentiator. For example, InDriver allows for anegotiated fare, where the user proposes a fare and drivers place bids; 13CABS states that there is no surge
pricing for taxis in their network. For ridesharing, where there are many platforms and taxi fleets competing,consumers have experienced lower prices (including through discounts and promotions). Some havequestioned the sustainability of such pricing in the longer term, given that some new operators are
loss-making and underwritten by venture capital (Ryder 2021).
Table 5.1 – Typical differences between contract and employee platform work
Employer-employee

Independent contractor to

Independent contractor

relationshipplatform-branded service

advertising own services on

Hireup (aged care)

Most transport and food

platformdelivery platforms

Airtasker (misc. tasks)
Mable (aged care)

How are workers
recruited?

• Employees are hired by
the platform• Workers opt-in subject to• Workers opt in tomeeting platformadvertise services orstandards (e.g. own

accept offers, subject toequipment)

some set standards(e.g. occupational
licensing for Mable)

How are pay and• Pay and conditions (e.g.

• Price and pay rates• Workers set consumer

conditions set?

minimum wage, loadings

typically set by platforms,

price per task or negotiate

and superannuation) at oras per contract between

with individual clients, as

above relevant award andplatform and worker.

per contract between

National Employment

Exceptions include

platform and worker

Standards

InDriver (customer
proposed fares)

How are working hours
set?

• Employers roster staff or• Workers choose• Workers choose

working hours arranged

autonomously when andautonomously when andbetween casual staff

where to work, subject towhere to work, subject toand clientssafety measures, whichsafety measures, which

may include maximum

may include maximum

shift duration

shift duration• Minimum shift lengths forcasual workers

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Finding 7.7
Platform business models are efficiency-enhancing
By improving the matching of services to consumers, consumer choice, competition, and the quality andvariety of available services, platform work can contribute to productivity growth and have broader benefits
for consumers and workers.
People choose to engage in platform work for different reasons, including:• low barriers to entry where workers have difficulty getting jobs in the formal labour market — someworkers use platform work as their main source of income• autonomy over hours of work — some workers find that attractive pay rates are available for shortdurations of peak demand, or through multi-apping, or as a supplement to their main source of income• choice in tasks, where platforms have less control over the type of tasks completed by a worker.

5.3

Regulatory challenges relating to minimum pay andconditions in Australia

As a nascent disruptive business model platform work poses challenges for regulatory frameworks andextant business models. Identifying and dealing with genuine risks to social wellbeing will require nuanceand balance to ensure the benefits of the gig economy are not unduly suppressed. The Productivity
Commission’s Inquiry into Aged Care Employment (PC 2022b) provides an in-depth examination of theseregulatory challenges in platform work within the Australian aged care industry.
Much public discussion about platform work, both in Australia and internationally, relates to employment status —whether a worker is an employee or independent contractor — which determines worker rights and entitlements
and platform obligations, as relates to minimum pay and conditions, and work, health and safety (WHS)
obligations. Independent contractors generally do not have access to employee entitlements (such as aguaranteed minimum wage). In some industries, platforms simply improve the matching process between an
independent contractor and consumer for services, leading to better consumer choice with on-demand services.
In other industries, such as ridesharing and food delivery, where platforms have a high degree of control over how
work is performed and where workers are independent contractors, there may be concerns relating to conditions,work health and safety obligations and dispute resolution, which would need to be carefully addressed.
Internationally, different approaches to the employment status of platform workers have included introducing
or modifying legal tests to identify employees and independent contractors or introducing a third,
intermediate category of worker between an employee and independent contractor.

The experiences of other countries provide lessons for Australia
Several international jurisdictions have recently regulated the workplace relations aspects of platform work,
have had legal test cases clarify some worker entitlements, or are in the process of creating and passing
legislation to do so, mainly focusing on ridesharing and food delivery (box 5.2). These various approaches
highlight a number of practical issues:• A codified legal test that determines employment status must be worded carefully. A poorly-worded test
may not be specific enough to address policy issues and could be too open to changes in platform

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business models to avoid coverage or cause reclassification of employees to other forms of employment
or, conversely, could impose excessive regulatory burden or stifle the productivity-enhancing aspects ofplatform work.
• Introducing a third category of worker could create additional uncertainty about the definitions of
employment status for ‘traditional’ employees, independent contractors and platform workers if thecodified definition is imprecise.
• Providing universal minimum standards to all (or a defined subset of) platform workers would require thatsuch standards are tractable for those types of work.
• Adopting a status quo approach where legal test cases are used to clarify existing employment legislation
would not address policy concerns if existing legislation is not fit-for-purpose or if test cases fail. In somesuccessful cases, test cases may only clarify access to entitlements for a subset of platform workers (as in
the United Kingdom example below).

Box 5.2 – Platform work regulation in international jurisdictions
United States
In the United States, policy developments have largely occurred at the state or local level. These include:• voter propositions that definitively classify transport and delivery platform workers as independent
contractors. One example is Proposition 22 in California, exempting such workers from California’s
employment status test, though it is unclear whether the proposition is constitutional.a Proposition 22
provides a minimum wage when a worker is actively completing a task and provides some liability
insurance and personal injury insurance coverage• regulating minimum pay and conditions for ridesharing, food delivery or both. Examples include in
New York City, where the minimum payment rates (per mile and minute) account for worker expenses
and utilisation, in Washington State for ridesharing (Uber 2022e) and in the City of Seattle for delivery
platform workers (Seattle City Council 2022)• interpreting existing employment law. In September 2022, Uber paid US$100 million to settle abackpay claim relating to unemployment insurance taxes in New Jersey. The New Jersey Labor
Commissioner has stated that the settlement means ‘these [Uber] workers in New Jersey arepresumed to be employees’ (Metz 2022). However, it is unclear how the settlement will affect worker
entitlements or Uber’s future liability.
Some federal departments have also released policy guidance related to platform work and contracting,including the Federal Trade Commission (2022) and the Department of Labor (2022).
CanadaIn April 2022, the Digital Platform Workers’ Rights Act, 2022 (DPWR Act) was legislated in the provinceof Ontario, Canada. The DPWR Act defines digital platform work as the provision of for-paymentrideshare, delivery, courier or other prescribed services by workers who are offered work assignment by
an operator through a digital platform.
The DPWR Act provides digital platform workers with seven rights:• information from the digital platform operator, including how pay is calculated, what factors are used toassign work and the consequences of performance ratings, if used
• a recurring pay period and pay day141Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 5.2 – Platform work regulation in international jurisdictions• a minimum wage
• amounts earned by the worker and tips and other gratuities, and limits to the circumstances in which
platforms can withhold pay or deduct from earnings• notice of removal from an operator’s digital platform, requiring written explanation for removal andplatforms to provide notice if access is removed for more than 24 hours• work-related dispute resolution in Ontario• freedom from reprisal.
United Kingdom
Policy developments within the United Kingdom has largely occurred within existing law. In February 2021,
the UK Supreme Court ruled that Uber drivers were considered ‘workers’, a category separate to that of
employees or independent contractors. No new legislation was required to classify Uber drivers as workers
that receive these entitlements. Rather, the worker status already existed under UK employment law. In the
United Kingdom, Uber is required to provide its drivers a minimum wage and paid leave entitlements,
where the minimum wage is calculated during the time that a driver is transporting a passenger.
The ruling does not automatically apply to other platform workers — if drivers on other platforms or fooddelivery riders believed they should be classified as ‘workers’ they would need to allege misclassification
through legal proceedings. For instance, Deliveroo riders are not legally considered ‘workers’ for the
purposes of the United Kingdom’s collective bargaining laws, although as of September 2022, an legal
appeal to the Supreme Court is ongoing (Criddle 2022).
European Union
In December 2021, the European Commission proposed a Directive to ensure that digital platformworkers were granted the correct legal employment status. The Directive involves a rebuttablepresumption that digital platforms are considered employers if they fulfil at least two of the following:• effectively determine or set upper limits for the level of remuneration• require the platform worker to respect specific binding rules with regards to appearance, conduct
towards the recipient of the service or performance of the work
• supervise the performance of work or verifying the quality of the results• effectively restrict the freedom to organise one’s work, in particular the discretion to choose one’s
working hours or periods of absence, to accept or refuse tasks, or to use subcontractors or
substitutes, or• effectively restrict the possibility to build a client base or to perform work for any third party.
The people deemed to be working through these employers would hold the status of ‘worker’ and havethe right to a minimum wage (where it exists within a Member Country), collective bargaining, working
time and health protection, the right to paid leave or improved access to protection against work
accidents, unemployment and sickness benefits, as well as contributory old-age pensions.
The Directive is currently undergoing negotiations with EU Member Countries before legislation is to be
introduced (Chee 2022).
a. Proposition 22 passed and was later ruled as unconstitutional (Norton Rose Fulbright 2021). Platforms havefollowed the regulation specified in Proposition 22 while an legal appeal against the ruling is held (Allsup 2021).

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Regulatory challenges relating to minimum pay and conditions inAustralia
Like many other countries, most platform workers in Australia are classified as independent contractors rather
than employees (exceptions include Hireup, a care platform and Milkrun, a rapid grocery delivery platform).
While the ‘gig economy’ is relatively novel, Australia has long used independent contracting in a number ofoccupations, including heavy vehicle freight, some health services (GPs and some allied healthprofessionals), and many trades. The value of contracting largely relates to occupations where someone withspecialised skills and assets can provide services to many different clients. There are longstanding concerns
about the misrepresentation of an employee-employer relationship as that of a contractor (i.e. ‘sham
contracting’). The Productivity Commission has previously recommended strengthening regulation of shamcontracting — such that the legal definition of sham contracting be changed from one where an employer
has ‘recklessly’ made a misrepresentation to a test of ‘reasonableness’ (PC 2015c, pp. 813–815).89 The Fair
Work Act 2009 (Cth) (FW Act) continues to set the bar at ‘reckless’ (s. 357(2)).
Platforms have often been introduced into occupations where independent contractors, labour hire and other
non-traditional employment arrangements were all relatively common. As such, the introduction of platforms
in those occupations have changed the dynamics of work but have not raised questions about theemployment status of workers.
Questions remain about fairness, the responsibilities of platforms and the rights of platform workers,
particularly at the lower end of the income scale or in occupations that entail physical safety risks. Rideshareand food delivery in Australia tend to involve platforms with ongoing, direct90 relationships with individual
contractors, sharing some similarities with employee-employer relationships. For occupations like fooddelivery and ridesharing services, platform contractor work can often entail low pay (that is, after costs, payclose to or below the National Minimum Wage) and some elevated level of risk to personal safety, while
operating outside the scope of National Employment Standards, awards, and often of any form of bargaining
on rates and conditions. For those whose main source of income is made via platform work, further
drawbacks may include variable and fragmented hours of demand and the lack of sponsored professional
development opportunities. In voluntary administration or liquidation, contract platform workers may beconsidered unsecured creditors, 91 with low priority in making claims on assets to recover any owed amounts.
These are the downside risks associated with any form of self-employment.

In Australia, employment status is determined through the common law
While classifying platform workers as employees would lead to pay, conditions and responsibilities (ofplatforms and platform workers) consistent with regulatory requirements specified in the FW Act, modern
awards and the National Employment Standards, it would necessitate a significantly different business modelto those used by most platforms. In some cases, it would remove aspects of platform work that are preferred
by workers and that lead to better matching of services to consumers.

89 The exact recommendation was also supported by the Australian Government’s Black Economy Taskforce (2017, p. 236).
90 While platforms in care services (e.g. Mable) or freelancing and odd jobs (e.g. Airtasker) allow consumers to choose

individual service suppliers, the relationship between consumer and worker is less direct in other occupations. For
rideshare and food delivery, consumers are more interested in finding the next available worker, rather than choosing,say, the most skilled and qualified delivery person. As a result, platform workers arguably have a more direct relationshipwith the platform than with customers.
91 For instance, during Deliveroo’s exit of the Australian market in November 2022 (Ziffer and Janda 2022).
143Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report

At the time of writing, the common law legal precedent from Personnel Contracting and Jamsek has
established a high threshold for classifying platform workers as employees in rideshare and food delivery inAustralia (box 5.3).

Box 5.3 – Australia’s common law approach to determining employment status
In Australia, some platform workers have disputed their classification as independent contractors andhave contended that they should have the rights and entitlements of employees. Under Australia’scommon law approach, employment status determinations are affected by the precedents set by otherlegal cases — most recently by Personnel Contracting and Jamsek, which were heard in the High Courtof Australia in February 2022, though these two cases did not involve platform workers.
Legal commentators suggested that the outcomes of Personnel Contracting and Jamsek gavepre-eminence to the written terms of the contract in determining employment status, when ‘the efficacy of[the contract] not challenged on the basis that it is a sham or is otherwise ineffective under general law or
statute’ (Handaya 2022; MinterEllison 2022). Some suggested that the decision was a departure from theHigh Court’s previous application of the multifactorial test (Power and Selinger 2022). As such, the view
was that it would be easier for businesses to engage workers as independent contractors (Longland etal. 2022). For instance, Prof. Andrew Stewart said that:
If you’ve undertaken to do some work on the basis of a comprehensive set of written terms,
it’s those terms which will be the basis for determining whether or not you’re an employee oran independent contractor, not the reality of your working arrangements … That is a big shift.
(Hutchens 2022)
Employment status determinations within platform work
Some platform workers have challenged their employment status using unfair dismissal laws after they
were deactivated by platforms. Under the national workplace relations system, unfair dismissal laws
apply to employees and not to genuine independent contractors.
In November 2018, the FWC ruled that a Foodora delivery worker was unfairly dismissed (though
Foodora had ceased Australian operations in August 2018). The Fair Work Ombudsman (FWO) had also
initiated legal proceedings against Foodora, alleging sham contracting, although the proceedings werelater discontinued following Foodora’s cessation of operations (FWO 2019).
In December 2020, it was reported that Uber settled a case with a delivery worker after an appeal by aformer Uber Eats driver for unfair dismissal reached the Federal Court of Australia (Marin-Guzman 2021).
The appeal to the Federal Court followed a decision by a Full Bench of the FWC in April 2020, which foundthat the driver was not an employee and therefore not protected by unfair dismissal laws.
In August 2022, a Full Bench of the FWC overturned a previous decision about the employment status ofa Deliveroo delivery worker, following an appeal by Deliveroo. (The previous decision, in May 2021, had
found that the delivery worker was an employee and unfairly dismissed.) The Full Bench stated that they
were bound by the precedent set by Personnel Contracting in overturning the previous decision:
As a matter of reality, Deliveroo exercised a degree of control over Mr Franco’s performanceof the work, Mr Franco presented himself to the world with Deliveroo’s encouragement as partof Deliveroo’s business, his provision of the means of delivery involved no substantial capital

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Platform work and the gig economy

Box 5.3 – Australia’s common law approach to determining employment status
outlay, and the relationship was one of personal service. These matters, taken together,would tip the balance in favour of a conclusion that Mr Franco was an employee of Deliveroo.
However, as a result of Personnel Contracting, we must close our eyes to these matters.
Sources: Stewart (2021, p. 81); Marin-Guzman (2021); Joshua Klooger v Foodora Australia Pty Ltd [2018] FWC 6836; Amita
Gupta v Portier Pacific Pty Ltd; Uber Australia Pty Ltd t/a Uber Eats [2020] FWCFB 1698; Diego Franco v Deliveroo Australia
Pty Ltd [2021] FWC 2818; Deliveroo Australia Pty Ltd v Diego Franco [2022] FWCFB 156 (17 August 2022) at 54.

Should platform pay and conditions be regulated?
Most Australian platform workers do not have the legislated minimum pay and conditions that apply toemployees that as they are engaged as independent contractors outside of national or state workplace
relations systems. Pay rates and conditions for platform workers are affected by market conditions and theircontracts with platforms (some platform workers will have more control over pay and working arrangements).
The Independent Contractors Act 2006 (Cth) (the ‘IC Act’) has limited contractor protections, including theability for contractors to apply to the Federal Court or Federal Circuit and Family Court of Australia to review
a contract if there are ‘unfairness grounds’ — one ground being if the remuneration rate is less, or likely to beless, than an employee performing similar work (section 2.4). The provision is rarely used (IRV 2020, p. 171).
A limited set of platform work is subject to existing state workplace relations laws that set minimum entitlements.
Amazon Flex drivers in New South Wales are owner-drivers covered under the Transport Industry — General
Carriers Contract Determination 2017 (NSW) and Transport Industry — Courier and Taxi Truck Contract
Determination (NSW), which includes minimum pay rates by class of vehicle (Wolters Kluwer Australia 2022).
Some platform workers may be eligible for the Victorian Government’s Sick Pay Guarantee scheme, which
provides 5 days of sick leave, paid at the National Minimum Wage, for a defined list of casual or contract
workers who do not have paid leave entitlements. While rideshare and food delivery platform workers do notappear to be eligible, some aged care and disability support platform workers may meet the criteria (Victorian
Government 2023) (Victorian Government 2023). The Sick Pay Guarantee is a two-year pilot scheme,
ending in early 2024.
Platforms have expressed varied perspectives on the regulation of pay and conditions. In their agreementswith the Transport Workers’ Union (TWU), DoorDash and Uber expressed support for an independent bodyin Australia that would determine minimum standards (box 5.4). Mable described its operations in aged careas a ‘marketplace’ where parties directly form agreements covering the types of services delivered and theterms — including rates of payment. (sub. IR152, p. 1). Hireup argued that platforms in disability support playa significant role in all phases of a support relationship (including finding clients, arranging shifts, andaccessing training and payment) and as such the platforms ‘very much act as employers to their support
worker ‘employees’’ (sub. IR109, p. 1).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 5.4 – DoorDash and Uber agreements with the TWU on principles of regulation
In May 2022, the TWU and DoorDash agreed to advocate for industry-wide standards set by anindependent body and agreed to six core principles that should apply to transport platform work. The
agreement included to develop a future Memorandum of Understanding and to jointly advocate topolicymakers on a preferred policy option (DoorDash 2022). The six principles were that:
•
•
•
•
•

workers should not be prohibited from accessing appropriate work rights and entitlements
workers must have transparency
workers must have the opportunity to contribute to a collective voice
workers must have access to dispute resolution processes
appropriate resources should be allocated to ensuring industry standards are establishedand maintained, and to driver education and training• There should be a three-stage approach towards achieving regulation of the on-demandtransport industry.
In June 2022, the TWU and Uber agreed to four principles of regulation about on-demand delivery andrideshare platform workers who are independent contractors. The agreement also included commitments
by the TWU and Uber to further discuss the operationalisation of the four principles of regulation, and to
discuss, in good faith, industry standards in food delivery and sector standards in other Uber services,such as ridesharing and the delivery of goods.
The principles below are intended to cover on demand delivery and rideshare platformworkers in the transport industry who are not engaged as employees. Employees alreadyhave entitlements under the Fair Work Act and other legislation …
The TWU and Uber support the Federal Government legislating for an independent body, or a
stream of an independent body, specific to platform work and comprised of (sic) industry
experts, with the capacity to:
1. Set minimum and transparent enforceable earnings and benefits/conditions for platformworkers based on the principle of cost recovery, taking into account the nature of the work.
2. Facilitate a cost effective and efficient mechanism to resolve disputes such as deactivationof relevant platform worker accounts. Any dispute resolution mechanism must be fit for
purpose for platform work.
3. Ensure the rights of platform workers to join and be represented by the relevant Registered
Organisation are respected and that platform workers have an effective collective voice.
4. Ensure that appropriate enforcement exists to meet these standards and objectives.
The TWU further stated that it did not support creating a ‘third category of worker’ in Australia’s
workplace relations system as it could risk reclassification of employees into the hypothetical third
category (TWU, trans., p. 9).
Sources: DoorDash (2022); TWU (2022).

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Platform work and the gig economy

Comparing piece rates to hourly rates can be difficult
It can be difficult to compare hourly earnings between platform work and other forms of employment,
particularly if the former involves pay rates per customer, if workers choose their own hours of work, or if
there is ‘down time’ between customers. About 40% of platform workers stated that they did not know what
they earned from their main platform (McDonald et al. 2019, p. 5).
In rideshare and food delivery, demand often spikes around particular times of day, where prices anddemand are higher (for instance, in the evening for food delivery platform work) (figure 5.2). Changes in both
the demand for services by consumers and the supply of platform workers will affect pay rates and prices(which are set by the algorithm) as well as the share of time that workers spend completing a task comparedwith being on-call, where a worker is logged on but does not have a task. As such, for workers, per-customer
pay rates not only cover the time and effort required for fulfilling the service, but also waiting for a task offer
and travelling to the pick-up point.
These complexities mean that it is impossible to determine the pay rate for platform work (on a per task
basis) that would always be commensurate with the award for employees in similar work. Conversely, if
comparisons are made in terms of hourly income, assumptions would need to be made about reasonablewaiting times or travel to pick-up points. This context is relevant to determining whether (and if so, how) pay
should be regulated for rideshare, food delivery, and some forms of task-work. The treatment of down-timeand time spent travelling to pick-up points would be crucial. It would be more straightforward to design any
stipulated minimum pay rate for rideshare, food delivery, and other task-based work on a per-task basis, but
to consider what typical downtime may look like per hour (or other unit of time).
For instance, for ridesharing, it may also be necessary to design incentives such that drivers would not be
rewarded for extending waiting times, or for choosing to drive in off-peak times where demand is low. In New
York City (NYC), high-volume ridesharing platforms — including Uber and Lyft — are required by law to pay
drivers a minimum rate per mile and minute, which considers expenses incurred as a driver, as well as theaverage time spent without a passenger for a given platform. However, platforms can still set pay rates todrivers above the floor (for instance, if there is high demand from consumers).
The New York City Taxi and Limousine Commission determines minimum pay rates for high-volume
ridesharing platforms using administrative data provided by platforms to account for time where a driver is
waiting for a trip offer. When the policy was introduced in 2018, the minimum pay rates — calculated per mileand per minute when a driver is transporting a passenger — were intended to result in an hourly wage of about
US$15 per hour after costs (New York City Taxi and Limousine Commission 2018, p. 3).92 That said, more than
60% of rideshare drivers in NYC work full-time hours (providing about 80% of rideshare trips in NYC) (Parrott
and Reich 2018, p. 3) — only 14% of Uber drivers in Sydney worked more than 30 hours per week in 2017-18(AlphaBeta 2019, p. 16) 93 — and there are geographical differences between NYC and Australian cities.

92 In 2018, New York City’s minimum wage for large businesses was US$15 per hour.
93 Although this may be an underrepresentation of the number of hours worked by rideshare drivers if there is a highlevel of multi-apping.
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Figure 5.2 – Food delivery platform activity is highly time-dependenta, b
Activity on food delivery platforms in New York City, fourth quarter of 2021
Workers engaged

Utilisation rate (%)

12000

100

All workers

80

9000

Car

60

E-bike6000

E-bikeAll workers

40

Car
3000

20

0
12 AM

4 AM

8 AM

12 PM

4 PM

8 PM

0
12 AM

4 AM

8 AM

12 PM

4 PM

8 PM

Deliveries per hour per worker
3.0

2.5
E-bike2.0

1.5

All workers

1.0

Car
0.5

0.0
12 AM

4 AM

8 AM

12 PM

4 PM

8 PM

a. The ‘workers engaged’ figure is the daily average of workers logged into a platform. The ‘utilisation rate’ is the share ofworking time (the time logged into a platform) a worker spends in during a trip, either retrieving food or delivering food toa passenger. The category ‘all workers’ includes food delivery platform workers using e-bikes, cars, motorcycles andthose who deliver on foot. b. New York City data is used as an illustrative example, given lack of Australian data.
Source: NYC Department of Consumer and Worker Protection (NYC Consumer and Worker Protection 2022, p. 16).

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Platform work and the gig economy

Platform worker earning rates vary across industries and occupations
There is a wide dispersion of earning rates across platform workers in Australia (box 5.5).

Box 5.5 – How much do platform workers earn?
There is significant variation in platform workers’ earnings, depending on the type of work completed andindustry (figure below). In 2018-19, median wages across different industries varied between about $20
and $45 per hour, a high level of dispersion that is also a characteristic of employee wages acrossindustries (ABS 2022a).
However, estimates of hourly rates are subject to error and uncertainty. Many platform workers find it
difficult to estimate their hourly rate as many are paid per task, rather than an explicit hourly rate
(IRV 2020, pp. 37, 55). The estimation of an hourly rate is also complicated by:• ‘downtime’ in searching for a job or travelling to and from a job, which is often not paid• ‘multi-apping’, where workers are active on two or more platforms and choose the most profitable
tasks, is also not collected in platform data, but likely to be considered in direct surveys of workers.
This is one area where future ABS data collection may prove helpful.
• the need to subtract costs from gross earnings• the varying time periods to which estimates relate, which is problematic given the high growth rate ofplatform work and the dependence of rates on the tightness of the general labour market.
Platform workers’ earning rates vary by type of worka
Median earnings per hour, 2019 (unadjusted for inflation)
Personal services
Sales and marketing support
Professional services
Education
Creative and multi-media
Software development and technology
Skilled trades work
CaringOdd jobs and maintenance work
Writing and translation

Transport and food delivery
Clerical and data entry

0

10

20
30
Dollars per hour

4050

a. Estimates from the National Survey are approximate only as it is unclear whether respondents reported gross or
net earnings after cost, some respondents may work for platforms in different categories of work, data is categorisedby the type of main platform, and the sample size is low (IRV 2020, p. 59).
Source: McDonald et al (2019, p. 43).

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 5.5 – How much do platform workers earn?
Other data on earnings provide insights into variations between workers and across platforms. The
Select Committee on the Impact of technological and other change on the future of work and workers in
New South Wales (2022, pp. 18–19) found that (in rounded figures):••••Ola drivers made $25 or $26 per hour
Deliveroo workers made $10 to $11 per deliverya
Menulog workers made $11 to $12 per delivery
EASI workers made $8 to $9 per delivery.

Using administrative data, Sydney Uber drivers on average earned $21.00 per hour (after costs) in late2017–2018 (AlphaBeta 2019, p. 20). For deliveries made during high demand periods (defined as‘mealtimes’ by Accenture), Uber Eats delivery workers who delivered by car earned on average $20.74
per hour, those by motorcycle $21.97 per hour and by bicycle $21.92 per hour, leading to an average
take-home hourly rate of $21.55 (Accenture 2021, p. 3). (An average hourly rate for all hours worked was
not reported for Uber Eats.)
Submissions to the Select Committee on Job Security (2021) by platforms and unions provided averagehourly earnings estimates between:••••$12.85 to $21.00 per hour (after costs) for rideshare platforms$10.42 to $21.55 per hour (after costs) for food delivery platforms$10.00 (after costs) to $29.84 (before costs) per hour for parcel delivery platforms$25.00 to $31.52 per hour for disability and aged care platforms.

One consideration with ridesharing and food delivery is the time spent offering the service, but without apaying customer, and any surge pricing.
More recent data from care platforms were supplied to the Productivity Commission for its inquiry into
Aged Care Employment (2022c) and through submissions to the Productivity Inquiry. The average rates
per hour for weekdays after platform fees for workers engaged via Mable (sub. IR152, p. 2) were:••••$114 per hour ($112 per hour Monday to Friday) for allied health care
$57 per hour ($55 per hour Monday to Friday) for nursing$45 per hour ($43 per hour Monday to Friday) for social support and domestic assistance$48 per hour ($46 per hour Monday to Friday) for personal care.

On Careseekers, the average pay rate for workers providing aged care was $38 per hour and fordisability support it was $43 per hour (pers comms, 6 and 8 August 2022). Across both platforms,
average pay rates were higher on weekends and public holidays (PC 2022c, p. 8).
Disability care workers on Hireup, who are engaged as employees, are paid at the applicable award rate
under the SCHADS award and receive employee entitlements (such as superannuation, casual loading,minimum payments under broken shift allowances, penalty rates and workers compensation).
a. Deliveroo exited the Australian market in November 2022.

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For example, a 2019 national survey of platform workers reported a median earning rate of $20.00 per hourfor transport and food delivery, compared with a median of $56.85 per hour for professional services(McDonald et al. 2019, p. 43). (There is also variation in the distribution of earnings rates within industries).
However, the evidence suggests that the per-task fees offered by some platforms in food delivery may be on
average less than the adult minimum wage for casuals based on assumptions about how many tasks werecompleted per hour and available public data on earnings.94
In other industries, platform workers may, on average, earn in excess of the otherwise-applicable award rate,
reflecting that workers may adjust their rate to account for the absence of employee entitlements andconditions (such as casual loading, penalty rates, superannuation and minimum shift lengths). Such rates
may also reflect the current high demand for skills and services — including the capacity for many to get jobs
in the formal sector as an employee and the ability for workers to differentiate their services, such as byhaving more experience or areas of specialisation in an industry.
For example, the average take-home pay for contract aged and disability support personal care workers on
Mable95 during weekdays is higher than the minimum weekday employee pay for a Level 3 home care worker
with a Certificate III under the Social, Community, Home Care and Disability Services Industry Award 2010(‘SCHADS award’) accounting for casual loading and superannuation, though not including other allowances orthe absence of workers compensation (PC 2022b, p. 8).96 However, neither the distribution of average
take-home pay on Mable, nor the share of employees paid above the relevant award minimum wage is known.
As such, relative pay and conditions established in awards for employees in the same industry or occupationand labour demand for such employee opportunities will also affect the pay rates commanded by contract
platform workers.

Better data on hours worked by platform workers is needed
Within a platform, there may be a wide variation in average hourly pay rates if some platform workers work
during periods of lower demand, where prices and or the number of tasks is often lower. There are someworkers in ridesharing and food delivery who work close to, or exceeding, full-time hours and provide a
disproportionately large share of the total service hours supplied.
For instance, in late 2017 to 2018 about 14% of a sample of Sydney Uber drivers worked more than 30hours per week and comprised 44% of total hours driven (AlphaBeta 2019, p. 16). In 2020, about 21% ofUber Eats drivers worked more than 30 hours, however, a comparable figure for the total hours delivered
was not published (Accenture 2021, p. 11).
A TWU survey found that average hours worked by their surveyed rideshare drivers and food delivery
workers (across a range of platforms) were 34 hours and 38 hours per week (TWU 2021, p. 10,14). In
comparison, a 2019 national survey of platform workers found an average of 14.5 hours per week worked by
platform workers whose main platform was categorised as transport and food delivery (McDonald et al. 2019,p. 44). The same national survey found an average number of hours ranging from 3.4 hours per week for94

The casual adult minimum rate is partly relevant because casual employees receive a 25% loading to compensate forthe absence of paid leave entitlements and the varied times of work.
95 Requiring a Certificate III or two years of demonstrated experience.
96 As of the publication of Aged Care Employment (PC 2022c). This is pending the conclusion of the work value cases
relating to the aged care industry at the Fair Work Commission. These cases include various applications by the HealthServices Union and the Australian Nursing and Midwifery Federation to vary minimum award wages, amend clauses,
and to add additional schedules in the Aged Care Award 2010, Nurses Award 2010 and the Social, Community, Home
Care and Disability Industry Award 2010 (cases AM2020/99, AM2021/63 and AM2021/65).
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workers whose main platform was categorised as education, to 14.5 hours for transport and food delivery
workers (being the highest average hours worked per week).
Overall, evidence about the number of hours worked is limited by uncertainty about the representativenessof the relevant surveys, the age of data, and their sample sizes. Better data would reveal the distribution ofhours worked (including time logged on without a task), not just the average, and similarly for earnings. A
further challenge is that where there are high levels of multi-apping, data from a single platform may present
an underestimate of working hours. For instance, many rideshare drivers in NYC work for both Uber andLyft.97 As such, studies that use data from only one platform are not able to fully track activity acrossridesharing (Koustas, Parrott and Reich 2020, p. 13).
Where workers rely on these forms of work as their main source of income, this may be the result of barriers toother forms of work. In some cases, this may be associated with working restrictions in visas, the need for flexible
hours of working, limited English language proficiency and lack of professional networks for new migrants. For
instance, in the TWU’s survey, about 73% of food delivery drivers were on some form of visa (TWU 2021, p. 13).
In a survey of Uber Eats delivery workers, 29% said that visa restrictions acted as the largest barrier to themobtaining work as an employee, followed by limited skills and experience (23%) and limited English fluency (15%)(Accenture 2021, p. 12). This means that for many platform workers, their realistic job options, outside of platform
work, would tend to be isolated to the low-wage part of the economy (such as café workers).
In addition, some platform workers face uncertain cash flows due to the way payments are processed.
Platform workers who are independent contractors do not have guarantees on a maximum period of time
before they are required to be paid for their services, unless explicitly specified by a platform. Some
platforms specify a specific cycle for payment (such as Amazon Flex (nd), which pays weekly) and some
platforms may also allow workers to ‘cash out’ payments on an ad-hoc basis subject to limits (such as Uberand Deliveroo). However, other platforms may not specify a maximum time for payment processing after aservice is delivered. For example, in disability care, payments relying on NDIS funding are contingent ontimesheet approval, and funding may be delayed if a client overspends on an NDIS plan or if a client exceed
the NDIS-imposed cap for funding on a service (Karp 2022).
Fee-setting methods can also affect the net earnings of platform workers (box 5.6).

Box 5.6 – Fee-setting in platform work
The method of fee-setting varies by platform. Independent contractors traditionally agree prices forservices directly with consumers, and the use of platforms does not always change this. In contrast,
rideshare and food delivery, where the service is delivered under the platform’s brand rather than theindividual supplier, there tends to be a consumer price and worker pay rate set by the platform.
• On many transport and delivery platforms, consumers pay a price set by the platforms.
• On some care services, workers cannot charge consumers an hourly rate below a minimum rate. For
instance, on Mable, the minimum agreed rate that workers can charge as at August 2022 is $32 perhour before platform fees. This corresponds to workers receiving a net $28.80 per hour, andconsumers paying $33.60 per hour, after platform fees (PC 2022c, p. 76). About 10.5% of workers on
the Mable platform earn less than $40 per hour after platform fees (Mable, sub. IR152, p. 2).

97 As determined through administrative data provided by platforms to New York City’s Taxi and Limousine Commission.

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Box 5.6 – Fee-setting in platform work
There may also be a ‘soft floor’ where a platform displays a recommended price that is equivalent to anaward rate — for example, in Australia following an agreement between Airtasker and Unions NSW.
However, the agreed price between a consumer and worker may still be below the recommended price(Unions NSW 2017).

Platform workers who set their own fees can take into account their business costs, such as insurance, tax(the absence of) workers compensation and leave provisions, as well as training and licensing fees andprofessional service fees. However, where platform workers do not have a capacity to set their own fees,
their net earnings are vulnerable to variations in their business costs.
Finding 7.8
There would be productivity costs in shoehorning platform work into other categories
Categorising platform workers as employees would remove key benefits to efficiency and flexibility forworkers. Many platform occupations are a direct extension of existing independent contracting
arrangements, which can involve relatively high rates of pay.
Other platforms offer pay rates close to, or under, the National Minimum Wage. Workers who rely heavily
on these forms of work as a major source of income often face poor job prospects for reasons that would,
in many cases, be better addressed directly.

Collective bargaining for contract platform workers
Platform workers who are independent contractors could theoretically collectively bargain with platforms todetermine binding pay rates and conditions that are tailored to a platform and the type of work performed(which would be outside the enterprise bargaining framework that applies to employees). However, agreements
in Australia between platforms and unions have focused on determining the agreed principles on which certain
types of platform work should operate, such as industry-wide minimum standards determined by anindependent body. Such negotiations have been undertaken outside any collective bargaining framework andnone have yet resulted in a binding floor price that applies to all workers on a platform.
This could reflect within-industry competition, or the probability (and potential nature) of expected future
regulation by governments. It could also reflect that some platform workers have other ways of bargainingthat do not centre on securing binding pay rates — by ‘voting with their feet’ if their conditions are notsufficiently attractive, as evidenced by relatively high churn rates. For example, within 6 months, about 40 to
50% of Sydney Uber drivers had exited (Alexander et al. 2022, p. 181).

Collective bargaining for contract platform workers operates under a different framework
than that of enterprise bargaining for employees
A complicating factor for any use of collective bargaining for contract platform workers is that as independent
contractors, collective bargaining would fall under competition law, not employment law. As such, individual153

Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportplatform workers — operating as businesses — are considered competitors to one another.98 Without acompetition exemption from the ACCC, businesses (such as platform workers) who join to collectively
bargain with a target business (such as a platform) could violate competition laws. The ACCC (2014, p. 3)
stated that:In the context of competition law, collective bargaining refers to an arrangement under which two or
more competitors come together to negotiate terms and conditions (which can include price) with asupplier or a customer. Groups of businesses may sometimes appoint a representative, such as anindustry association, or in some cases a union, to assist them in the bargaining process.
The CCA [Competition and Consumer Act 2010 (Cth)] requires businesses to act independently of
their competitors when making decisions about pricing and other terms and conditions of trade.
By engaging in collective bargaining participants are at risk of breaching the CCA. Authorisation ofcollective bargaining is a transparent process by which the ACCC may grant protection from legal
action where it is satisfied in all the circumstances that the proposed collective bargaining
arrangement is likely to result in a public benefit that would outweigh the likely detriment to the
public arising from any lessening of competition.
This collective bargaining framework for businesses is distinct from enterprise bargaining by employees,
where enterprise bargaining processes are enshrined in the FW Act, not in competition laws.
Although the collective bargaining framework for businesses was not specifically designed for some of themore common platform work situations — such as those involving many individual independent contractors,
a platform that sets prices, and low barriers to joining — contract platform worker collective bargaining may
be pursued through an exemption from competition laws.
The simplest way for independent contractors to obtain a competition exemption is through using the
ACCC’s collective bargaining class exemption.99 Other methods include going through the notification andauthorisation processes (box 5.7), although target businesses, such as a platform, are not legally obliged tobargain. The ACCC is able to ‘withdraw the benefit of the class exemption from particular businesses (butnot retrospectively) if it is satisfied that the business, or businesses, is engaging in collective bargaining
conduct that substantially lessens competition and is not likely to result in overall public benefits’(ACCC 2021, p. 12).
To date, there has been no test of collective bargaining arrangements through the collective bargaining classexemption, or through notification or authorisation processes by contract platform workers, with or without
union involvement (ACCC, pers comms, 21 Sep 2022).

Competition exemptions and large-scale contract platform worker collective bargaining
A platform has little incentive to engage in collective bargaining with small groups of platform workers andthere is no legal requirement for a platform to engage with platform workers under collective bargaining

98 Although platform workers covered by Chapter 6 of the Industrial Relations Act 1996 (NSW) may also have collective

bargaining rights for the purpose of negotiating contract agreements — relating to contract conditions — under NSW
industrial law, without requiring competition exemptions. For instance, the TWU stated that Amazon Flex drivers ‘enjoy
enforceable rates of pay along with rights to dispute resolution, union representation and collective bargaining’ following
a revised NSW Industrial Relations Commission determination which expanded coverage to eligible owner-drivers ofvans with a carrying capacity between 1.5 and 3 tonnes (TWU 2022).
99 Broadly, the class exemption enables a business or independent contractor with aggregated turnover of less than $10
million in the preceding financial year, to form or join a collective bargaining group to negotiate with suppliers or
customers about the supply or acquisition of goods or services without the risk of breaching competition laws.
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arrangements in the CCA. However, a large enough group of workers may have the bargaining power tobring the platform to the bargaining table, though they would face several legal hurdles in doing so.
Whether a competition exemption is available for large-scale collective bargaining turns on two factors:
whether collective bargaining by a bargaining group would substantially lessen competition and whether
collective bargaining would likely result in a net public benefit. Under competition law, higher pay rates
resulting from an exemption to collective bargaining by platform workers might be seen as giving workers
countervailing power to address apparent monopsony power by a platform. In some of its generalcompetition investigations, the ACCC has expressed concern about monopsony power, as in the apparent
behaviour of supermarkets in respects of their suppliers (ACCC 2020). It has advocated for the inclusion of aprohibition of unfair trading practices in the CCA, though that has not yet occurred. It is unclear whether the
ACCC would regard platforms as exercising monopsony power over platform workers and even if convincedof this, whether it would regard an exemption a reasonable substitute for a prohibition of unfair trading
practices. More generally, the position the ACCC has taken with respect to countervailing power (as inmerger decisions), the ACCC has given most weight to the issue of whether any action by market
participants substantially lessens competition. The ACCC has not yet made determinations in this area in
relation to collective bargaining and platform workers.
While the collective bargaining class exemption allows businesses to lodge applications to automatically gain
protections from some aspects of competition law, the ACCC actively monitors all lodgements and can withdraw
the benefit of the class exemption from parties if such bargaining activity is likely to fail the net public benefit test.
However, a possible conceptual framework for determining whether exemptions should be given forlarge-scale collective bargaining by platform workers could usefully focus on the degree to which:• the platform controls key aspects of the transaction, such as setting consumer-facing prices and worker
pay rates• there is sufficient price competition in the markets in which current platforms compete, either from rival
platforms or non-platform competitors.
Where competition in those markets is strong, the capacity for collective bargaining at the platform-specificlevel to raise consumer prices excessively is tempered by the competitive pressures of rival platforms andother sources of market supply. For example, negotiation of a collective agreement in relation to earnings
between, say, Uber and its rideshare drivers, may not substantially lessen competition in the market for
on-demand passenger transport services.
A further issue is that whereas employees negotiating enterprise agreements have the right to take protectedindustrial action in support of their claims, a coordinated withdrawal of labour by contractor platform workers(a ‘collective boycott’) is legally complicated. The collective bargaining class exemption does not include an
exemption for collective boycotts, meaning platform workers would have to go through the notification
process or the authorisation process (ACCC 2021, p. 13).
A major obstacle to collective bargaining for platform workers is the placement of the issue in competition law
rather than workplace relations law. Under workplace relations law, the focus is on employee versus
employer bargaining strength and the resulting balance between the returns to employers versus employees.
The Modern Awards Objective of the FW Act does not refer to consumers at all (though we recommend thatit should do), with the only explicit connection to their interests incorporated indirectly in s. 134(1)(h) whichrefers to inflation. (In contrast, under the CCA, consumers’ interests are central.)Moreover, in rideshare platforms, for example, arrangements for independent contractors share several
common attributes with arrangements for employees of a large business (rather than for small competingbusinesses). For instance, there are often thousands of individual contractors with common contractual ties
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportto a single entity (the platform). The platform typically controls the customer-facing relationship, such that
customers book a service under the platform’s name, rather than choosing between competing contractors.
In addition, platforms in these industries tend to control many aspects of how work is carried out.
In some sense, there are reasonable arguments that the coverage of platform workers by the CCA reflects
flaws in the CCA. That said, platform workers are typically not employees in the conventional sense and so it
is not straightforward to place them under the umbrella of workplace relations law either. Accordingly,
platform workers bring into sharpest focus the tension between competition and workplace relations law, anddeciding where the line should be drawn is somewhat arbitrary.

Box 5.7 – Obtaining a competitive exemption for collective bargaining purposes
Competition exemptions for the purpose of collective bargaining (not enterprise bargaining) can beobtained through the collective bargaining class exemption (by lodging the notice form with the ACCC
and any target businesses — such as a platform), or by going through the notification or authorisation
process. The authorisation process involves a public consultation process and the publication of a draft
and final determination by the ACCC.
Whether the ACCC grants an exemption in response to an authorisation application, allows a notification
to stand, or withdraws the collective bargaining class exemption for a bargaining group is decided on acase-by-case basis. Broadly, bargaining groups are successful in obtaining a competition exemption if
the ACCC finds that the arrangements are not harmful to competition and/or are likely to result in overallpublic benefits.
Although public benefit is not defined in the Australian Competition and Consumer Act 2010 (Cth), thepublic benefits have been generally defined on a broad basis by the Australian Competition Tribunal (theTribunal). The Tribunal has stated that public benefits include (ACCC 2019, p. 43):
… anything of value to the community generally, any contribution to the aims pursued by thesociety including as one of its principal elements (in the context of trade practices legislation)
the achievement of the economic goals of efficiency and progress’. Plainly the assessment ofefficiency and progress must be from the perspective of society as a whole: the best use ofsociety’s resources. We bear in mind that (in the language of economics today) efficiency is aconcept that is usually taken to encompass ‘progress’; and that commonly efficiency is said toencompass allocative efficiency, production efficiency and dynamic efficiency.
While public detriment has been defined by the Tribunal to include:
any impairment to the community generally, any harm or damage to the aims pursued by
the society including as one of its principal elements the achievement of the goal of
economic efficiency.
Unions cannot provide notice on behalf of platform workers (or any other independent contractors orbusinesses) through the class exemption or through the notification process. However, a union can act
as a bargaining representative, regardless of which of the three processes the exemption is obtained
through. If a union wished to obtain legal protections from potential liability under competition law for
itself (in addition to the bargaining group), the union would need to go through the authorisation process.a

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Box 5.7 – Obtaining a competitive exemption for collective bargaining purposesa. The Transport Workers’ Union has applied for (and received) authorisation for a number of collective bargaining
arrangements relating to owner-drivers, albeit on a small scale. For example, see ACCC authorization numbers
A91589, A91514 and A91427 (authorisations granted).
Source: ACCC (2021).

Internationally, there have been a few cases where worker representatives have played a role in shaping the
pay and conditions of platform workers (though the workplace relations contexts in all these cases havediffered from Australia). For instance:• In Canada, Uber and the United Food and Commercial Workers Canada (UFCW) union agreed to ‘press
provincial governments’ to establish industry-wide standards including on a pay rate of at least 120% of
the minimum wage during ‘engaged time’ (that is, when a driver is transporting a passenger) and abenefits fund, while establishing a dispute resolution mechanism for Uber platform workers (Bellon 2022;
Uber Canada 2022).
• In the United Kingdom, Uber formally recognises the GMB union — Uber drivers are legally ‘workers’, anintermediate category between employee and contractor. In August 2022, the GMB union claimed credit
for increasing driver pay rates after fares were raised in London by 5%, although in an official statement,
Uber suggested that higher fares were implemented to attract more drivers (GMB 2022; Levingston 2022).
• In France, rideshare drivers will receive a minimum of EU€7.65 per trip, following a sector-wide agreement
between rideshare platforms and unions announced in January 2023 (Hummel 2023).

Contract platform workers may have little to trade away in collective bargaining
Regardless of the interpretation of the exemption provisions of the CCA or the option of covering platformworkers through workplace relations law, collective bargaining in platform work presents fewer opportunities
for higher returns to workers than in collective bargaining for many other workers. The productivity gains thatcan be associated with enterprise bargaining between employers and employees — including conditions thatallow for greater managerial flexibility and avoiding industrial disputes — are not likely to be present incollective bargaining between platforms and platform workers.
In enterprise bargaining, greater monetary (or non-monetary) benefits for employees are the result of trading
away entitlements that may limit productivity in the workplace. For vertical platforms, where the platform sets
the pay rate — especially where algorithms adjust pay rates in real time in response to demand fluctuations— platforms are already providing close to the exact wage level and working conditions required to attract
the workers they need.100
As contract platform workers do not have any legislated minimum standards (outside of those establishedthrough the IC Act and any applicable state-based legislation), a platform could unilaterally implement theconditions without having to provide an increase in monetary benefits, subject to the contract between theplatform and the worker and the capacity for the platform to attract and retain workers. Many, if not most, ofthe standard form contracts between platforms and platform workers have provisions that allow the platform
to modify the terms of the contract, with little or no notice.

100 If there is a worker shortage, the platform could temporarily increase pay rates to increase the incentive for moreworkers to be available to provide services.
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Furthermore, as currently structured, pay arrangements in vertical platform work is transactional in nature,reflecting the homogeneous type of work and the highly prescribed arrangements for organising work throughplatforms. While platform work is not unco-operative, the goal of co-operative engagement between employees
and employers that is a desired feature of workplace relations is not paramount, and would be unlikely to be
facilitated by collective bargaining under the CCA. Co-operation and trust in standard employer/employee
relationships create norms that improve managerial and worker conduct, reducing the need for costly
monitoring. But in the platform world, it is generally difficult for platform workers to continually ‘shirk’ in thesense of getting paid for a task not done (particularly with telemetry data collection and performance rating
systems), nor is it as easy for the platforms to engage in unfair practices specific to individual workers.
While workplace relation policy and the associated rules about bargaining have tended to reduce the incidence
and costs of industrial disputes and lockouts, this is not an issue in the platform economy. Indeed, one goal ofany bargaining under the CCA would have the opposite intent — to permit platform workers to legally withdraw
their labour in a collective boycott so as to provide greater pressure on platform providers for improvements inconditions. That would not necessarily be bad, but its effect would not be higher productivity to the extent that
this was the goal. Accordingly, large scale collective bargaining in platform work is unlikely to lead to
productivity improvements as the mechanism for funding higher wages. Instead, at best, it would increase thebargaining power of platform workers, allowing them to extract some of any rents from platforms or fromconsumers through higher prices, which may or may not pass the net public benefit test specified in the CCA.

Finding 7.9
There are significant hurdles to securing binding agreements on pay for contract platformworkers through collective bargaining.
Securing binding agreements on pay for contract platform workers through collective bargaining faces two
main hurdles:• Collective bargaining would be unlikely to provide sufficient productivity improvements to fund any
material improvements in pay and conditions.
• While large-scale collective bargaining may increase the negotiating power of platform workers toincrease their earnings by extracting profits from platforms or raising prices of services, such bargaining(or collective boycotts) by contract platform workers may not pass the net public benefit test undercompetition law — as such, bargaining groups may not be eligible for a competition exemption.

5.4

Improving dispute resolution between platforms andworkers

Processes to resolve workplace disputes that may arise between the platform and worker have a significant
bearing on how that working relationship operates in practice. Ineffective resolution arrangements may resultin high turnover and poor incentives for workers. Consumer confidence in platforms also relies on assurance
that platform operators can manage poor quality service by platform workers.
Workplace disputes between platforms and workers may relate to suspension or termination decisions, or(partial) non-payment for services or fines imposed by a platform, where a platform believes a worker has notcompleted a task to satisfaction or that there are risks to a consumer’s wellbeing. Some decisions may bebased on performance thresholds or have some algorithmic involvement (particularly for some vertical158

Platform work and the gig economy

platforms). Other forms of disputes may arise where a contract platform worker believes that there are unfair
contract terms in the services contract.
Current internal dispute resolution processes are flawed. The existence of appeal processes and therationale for platform decisions are not always apparent to workers, while external remedies are only partial,
costly and often not accessible to workers with limited English proficiency and limited legal knowledge.
Dispute resolution does not just involve the interests of platform workers. In some cases, suspension or
termination from a platform is warranted. For instance, Mable (sub. IR152, p. 3) highlighted that theimportance of consumer safety in aged care and disability care:
Because of the nature of the care economy, the principles of natural justice can be at odds withensuring appropriate care to, at times, vulnerable clients. As such, in instances where there may
be a risk to clients — due to a breach of any of the above instruments where an individual’s
welfare might be at risk — Mable will suspend or remove individuals from the platform.
Any dispute resolution process must consider consumer outcomes, including consumer safety and service
quality, and will be different for horizontal and vertical platforms as there are differences in the amount ofcontrol a platform has over how a task is performed.

Internal dispute resolution is in a formative stage
Internal dispute resolution mechanisms vary by platform and jurisdiction, as does the information available
to contract platform workers on public-facing websites. For instance, Airtasker states that it arbitrates
disputes between a worker and consumer relating to task performance (Airtasker 2022) and Mable statesthat if a consumer and support worker cannot resolve a dispute that either party can contact Mable byphone (Mable 2020).
On some platforms, it may not be clear to workers about how to initiate an appeal or review by a platform
representative — or that an appeal mechanism exists — beyond contact via email or through a webform,
which are not modes of real-time communication. For instance, in Australia, Uber’s webpage ondeactivation101 does not include the word ‘appeal’ (though it states that workers can contact the support teamfor assistance) while in some jurisdictions in North America, Uber drivers (or other rideshare drivers) can bereactivated following a dispute resolution process.
• In New York City, Uber drivers can appeal eligible deactivation decisions to a driver panel, which
comprises a selection of Uber drivers with high star ratings (Uber 2020).
• In Washington State, deactivated rideshare drivers can be represented by the Driver Resolution Center
during state-regulated dispute resolution (rideshare platforms must notify deactivated drivers that they canappeal a deactivation). Upon request, platforms must provide a detailed response about why a driver wasdeactivated. Following that, if a driver wishes to appeal, dispute resolution occurs through a two-stage
process. If a dispute is not resolved through the initial ‘good faith, informal resolution process’, there is a‘formal process that includes a just cause standard’ (Washington State Legislature 2022).
• In Canada, Uber drivers can be represented by the UFCW union during deactivation appeals or in otherdisputes in internal processes, the costs of which are jointly funded by the UFCW union and Uber
(Deschamps 2022).
In the United States and Canada, rideshare drivers who have been deactivated because of low ratings orhigh cancellation rates may be eligible for reactivation after taking a ‘quality improvement course’ (Uber nd).

101 As on https://www.uber.com/au/en/drive/safety/deactivations/, accessed 16 December 2022.

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In New York City, the course is provided by the Independent Worker’s Guild and free of charge to thedeactivated driver, while in other jurisdictions, the driver may incur a fee to access the course.

External dispute resolution remedies are largely unattainable
External remedies for disputes for contract platform workers in Australia are only partial in scope and not anaccessible mechanism for most platform workers The existing arrangements include:• unfair contract terms provisions within the IC Act or the Australian Consumer Law102 (the latter relating tostandard form contracts where a party is a small business. Many of the contracts between platformworkers and platforms would likely be considered standard form contracts)• state and territory mediation and arbitration services• state and territory tribunals.
Furthermore, it is unclear how these existing external dispute resolution remedies interact with arbitration
clauses present within some contracts between a platform and platform worker. While arbitration clausesvary, they generally reduce or exclude the ability to pursue a claim through some statutory law avenues,
common law avenues or both by requiring the worker to participate in binding arbitration through theplatform’s selected arbitration service, rather than to initiate court proceedings if a dispute is present.103
Some arbitration clauses may also exclude the ability of an arbitrator to hear a class action.
Workers who choose to initiate arbitration under a platform’s arbitration clause may be required to pay upfront
arbitration fees. Arbitration costs, notwithstanding legal fees, potential damages or the opportunity cost ofparticipating in arbitration, can include administration or filing fees (a lump sum) and the costs of having an
arbitrator present at a hearing (which may be hourly or a lump sum comprising the length of an arbitration
session) — the amount incurred by a worker and platform would depend on the exact fee schedule.
Some platforms may allow a worker to opt out of arbitration clauses, though this option may be time-limited
and subject to strict requirements as to validly provide notice. For instance, in Australia, DoorDash provides
an opt-out period of 30 days following the platform worker having agreed to the services contract, otherwise
the platform worker is deemed to have agreed to the arbitration clause. Furthermore, if a platform worker
wished to opt out, they would need to send notice in writing through post to a selected postal address — ‘any
attempt to opt out by email [would] be ineffective’ — and workers could not opt out using an agent or
representative (DoorDash nd).

Review of service contract under section 12 of the Independent Contractors Act
A contract for services can be reviewed by the Federal Court or Federal Court Circuit under section 12 of the
IC Act — on the grounds of the contract being unfair, harsh or both. An application for review may only be
brought by a direct party to a contract. Participants incur their own costs bringing or defending a case in theFederal Court or Federal Court Circuit unless deemed vexatious or without reasonable cause. Most platformworkers would not likely have the financial means to use this remedy or knowledge of the remedy. This
review mechanism is rarely used (IRV 2020, p. 167) and to the best of our knowledge, has not been used
102

The Australian Consumer Law is Schedule 2 of the Competition and Consumer Act 2010 (Cth).

103 Though arbitration clauses, as contract terms themselves, may be unenforceable if a court finds the term to beunconscionable. For instance, in Uber v Heller [2020 SCC 16], the Supreme Court of Canada allowed a class action toproceed outside the arbitration clause because of the upfront administrative and filing fees (about US$14 500) required
for the lead plaintiff, a food delivery worker, to lodge arbitration in the International Chamber of Commerce in the
Netherlands. The administration and filing fees would have ‘represented most of [the plaintiff]’s annual income’ and did
not include legal fees, foregone earnings and other costs of participating (Supreme Court of Canada 2020, pp. 4–5).
Platforms have largely responded by selecting domestic arbitration services.
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relating to platform work. It is not clear whether a court could order reinstatement under the IC Act even if thecourt had found that there were unfairness grounds within the services contract.

Penalties for unfair standard form contracts where a party is a small business
The ACCC and each state and territory consumer protection agency administer the unfair contract terms
laws in the Australian Consumer Law. Small business, including independent contractors, who consider they
are subject to unfair contract terms in any standard form contract can also take their own legal action in state
and territory tribunals and small claims courts. The Treasury Laws Amendment (More Competition, Better
Prices) Act 2022 (Cth) has recently amended the unfair contract terms laws so that, for conduct from
9 November 2023, a court is able to impose pecuniary penalties for contraventions of the unfair contract
terms laws, in proceedings commenced by the regulators (ie. the ACCC and the state and territory consumer
protection agencies). Independent contractors that take their own legal action are able to seek damages,
injunctions or other orders (such as the variation of their contract). The ACCC notes that:As an economy-wide regulator, the ACCC cannot pursue all matters that come to its attention. For
example, in the 2021-22 financial year the ACCC received just under 380,000 contacts. The
ACCC takes a strategic approach to enforcement and is selective in the matters it investigates.
The ACCC assesses which matters it will investigate based on its compliance and enforcement
policy and priorities, to direct its resources to matters that provide the greatest overall benefit to
the public. In particular, the ACCC focuses on conduct that will, or has the potential to, harm thecompetitive process or result in widespread consumer or small business detriment. (ACCC, Pers.
Comms., 1 February 2023)
Independent contractors may also be able to seek assistance from the Australian Small Business and FamilyEnterprise Ombudsman (ASBFEO), or state and territory Australian Consumer Law regulators, or small
business commissioners in their state, in formal or informal dispute resolution about potential unfair contract
terms in standard form contracts.
The Inquiry into the Victorian On-Demand Workforce similarly has identified state civil and administrative
tribunals as a potential avenue for recourse, but the Inquiry expressed doubts about whether such tribunals
have jurisdiction over disputes relating to topics deemed as ‘workplace relations matters’ under section 7 of
the IC Act (IRV 2020, p. 171).

State and territory mediation and arbitration services
State and territory small business agencies or commissions may offer mediation services, which, while notimposing binding decisions, aim to help parties reach an agreement. For instance, the Victorian Small
Business Commission offers mediation services for small business, including for contract platform workers.
Parties do not have to participate in the process if they do not wish to.
Some contract platform workers may have access to state and territory arbitration services — where thearbitrator can impose binding decisions — but such remedies are limited to certain states and types ofplatform work (the legislation governing such arbitration services may have exemptions from the IC Act).104
For instance:• in Victoria, platform couriers (including food delivery platform workers but excluding rideshare workers)
can pursue arbitration by the Victorian Small Business Commission if mediation fails to produce asatisfactory result (IRV 2022)

104 For instance, Part 5 of the Owner Drivers and Forestry Contractors Act 2005 (Vic) and Chapter 6 of the Industrial

Relations Act 1996 (NSW).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry report• in New South Wales, a limited class of contract platform workers, including Amazon Flex drivers, areeligible for conciliation and arbitration under Chapter 6 of the Industrial Relations Act (NSW).

Improving internal and external dispute resolution in platform work
Given the gaps in, and barriers to using, dispute processes, there are grounds to create more systematic,
low-cost and accessible means for parties to seek to resolve problems. In dispute resolution, best practiceusually involves several tiers:• robust internal dispute resolution is the first step as it can be quick, low cost and have the advantage thatit requires suppliers to have a systematic approach to dealing with complaints• external resolution by an independent body that can, if necessary, make determinations to resolve a
dispute that has not been settled through direct engagement between the disputing parties.

Principles guiding best practice internal dispute resolution
Such internal dispute resolution principles are already well established. Within platform work, the Victorian
Government will introduce voluntary standards in early 2023, including that related to dispute resolution (IRV(2022). The Treasury, ACCC and ASIC have also published guidance (and regulation, for the latter) forinternal dispute resolution, though not related to platform work. There is also an Australian Standard (AS10022:2022) for complaint handling management in organisations, most recently updated in 2022. The Fair
Work Ombudsman has set out detailed advice on effective dispute resolution (FWO nd).
Some common themes emerge — internal dispute resolution processes should be accessible, timely, fairand should provide complainants with substantive responses in writing. The digital nature of platform work
should also be considered in dispute resolution — most platforms do not have a face-to-face presence
where workers can raise issues with platform representatives. These features should be present in all
internal resolution processes.

An external, independent dispute resolution body for platform work withconciliation and arbitration powers
As existing avenues for dispute settlement through the Australian Consumer Law, the IC Act and patchy
state-based arrangements do not provide an accessible or systemic solution, there is a rationale for a new
institutional arrangement to serve that role. As noted in box 5.4, the TWU and Uber have already supported
the creation of an independent review body to cover on-demand rideshare and food delivery non-employee
platform work and platforms.
Given that the disputes fall into a workplace relations framework, and given its existing strengths ininvestigation, conciliation and resolution of disputes, the FWC looks to be a natural home for an external
resolution function. Housing the function in the FWC would avoid the fixed costs of a new institution. Notably,
the FWC has a well-established process for dealing with unfair dismissals, with an emphasis on conciliation,
but with the scope to take matters to a formal conference. It would adopt a similar approach toplatform-related disputes, and workers would face no charges for the services.
The independent body within the FWC could be funded through general revenue — as is the FWC.
However, there are grounds for using a combination of an industry levy105 to cover the fixed costs of thecomplaints function and a charge per complaint for the relevant platforms. The latter would encourage

105 This would be consistent with the levy arrangements of various other complaints hearing bodies, such as theAustralian Financial Complaints Body.
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platforms to improve internal processes so that the number of disputes escalated externally remain low.
Given the small number of platforms, a levy approach would not entail large compliance and administrative
costs. As noted above there are some existing ad hoc arrangements for conciliation and arbitration. Were
the FWC to undertake this function for all contract platform workers and for all jurisdictions, thesearrangements would become redundant. However, in the transition to the FWC taking over the role, it would
be sensible for any lessons from the Victorian and NSW arrangements to be used in developing the FWC’s
conciliation and arbitration role. It is probably undesirable to extinguish the legal remedies available underthe Australian Consumer Law and the IC Act, if for no other reason that it would require any new legislation
to set out difficult to define boundaries for what constitutes platform work. In any case, it is unlikely any party
would resort to remedies under these Acts given their cost and lack of accessibility.

Recommendation 7.18
Introduce independent dispute resolution for platform workers
The Australian Government should introduce an external, independent dispute resolution function within
the Fair Work Commission that can provide conciliation and arbitration services relating to suspension or
termination disputes or non-payment of earnings. The function should be funded by platforms and should
be designed to encourage platforms to improve internal processes, rather than relying on the external
body as the primary method of resolving disputes.

5.5

Platform work and safety

As noted above, while the efficiency-enhancing aspects of platform business models could be at risk undercertain regulatory approaches, it is important to consider where legitimate needs for regulation remain. If
platform business models were only viable because they avoid legitimate regulation, or because they canlower costs by not fully internalising risks to safety, then they would not be the source of properly-measured
productivity gains. For instance, personal injury risks to platform work should be adequately insured,
otherwise risk would be transferred onto public insurance programs, such as Medicare and the NDIS. As
such, it is important to consider how genuine safety issues can be effectively addressed, and whether thiscan be achieved while retaining the benefits associated with platform work business models.
As with other forms of work, platform work involves safety risks for consumers and workers (box 5.8). Whileplatform workers experience a wide range of health and safety risks, disentangling how much of this is causedby platform work and how much is due to the type of tasks they perform is not clearcut. Safety outcomes are
influenced by a number of factors including the systems and processes that platforms have in place for risk
reduction, the tasks a worker performs and how they are performed. Platforms have various WHS obligations(box 5.9) and safe work regulators are well-placed to provide ongoing guidance on best practice for platforms(for instance, regarding fatigue management systems in ridesharing). Personal injury insurance and workers’
compensation comprise one area of policy where platform work often differs from employment relationships.
The remainder of this section will largely focus on personal injury risks and insurance.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportBox 5.8 – What do we know about safety in platform work?
Aged Care Work — While there is no public data on the health outcomes of aged care platform
contractors, aged care work involves physical and mental health risks. For instance, about 14% of agedcare workers reported a work-related injury or illness in the 12 months preceding 2016 (Mavromaras etal. 2017, p. 42). These injuries or illnesses were most commonly sprains or strains, chronic muscle orjoint conditions and stress or other mental conditions.
Taxi and ridesharing work — Taxi drivers are at high risk of motor vehicle accidents and musculoskeletal
disorders (Burgel, Gillen and White 2012), the latter which may be exacerbated by long working hours(Murray et al. 2019). In a TWU survey of rideshare workers, 34% of respondents had been involved in a car
accident, 66% had experienced some form of harassment and 17% had been physically assaulted(TWU 2021, p. 14). (Most resulting injuries will not be covered by the catastrophic injury insurance schemes
operating across states and territories.)
Food delivery work — Food delivery workers may be less protected in a transport accident if they areusing a bicycle, motorcycle or scooter and may face time pressures to complete tasks (SIRA 2021a,p. 4). The deaths of food delivery workers in New South Wales in late 2020 prompted the NSW
Government to set up a taskforce to improve safety in food delivery platform work. A TWU survey
reported that 34% of respondents working on food delivery platforms had been injured while completingtasks (TWU 2021, pp. 10, 14). Delivering on multiple platforms simultaneously — called ‘multi-apping’ —could pose additional risk through time pressures and the need to interact with multiple apps while on abicycle or by motorised vehicle (SIRA 2021a).

Box 5.9 – WHS laws apply to platforms and contract platform workers
Model WHS laws, which are implemented in all states and territories bar Victoria, state that the primary
legal duty of care, to a worker as reasonably practicable, belongs to a person conducting a business orundertaking (PCBU). A PCBU may be the contract platform worker themselves and the platform theywork on. A worker can be an independent contractor or an employee, as the model WHS laws areagnostic to employment status and are intended to be responsive to changes in the way people work
(Stewart-Cromptom, Mayman and Sherriff 2008, p. 63).
Safe Work Australia states that the model WHS laws apply to the platform economy and othernon-standard working arrangements, but that the manner in which laws are applied depends on eachcase, including the contract terms of engagement (Safe Work Australia, pers comms, 28 October 2022).
Under Victorian occupational health and safety (OHS) law, platforms also have obligations to contract
platform workers:
WorkSafe confirmed that platform businesses do have duties to workers, whether
employment or independent contracting arrangements are used. Duties are also owed byclients, customers and procurers of services who engage workers, but vary depending on thenature of the arrangement between the parties — a central question is whether the worker isdirectly engaged as an employee or an independent contractor?

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Box 5.9 – WHS laws apply to platforms and contract platform workers
Once this question is answered, secondary questions arise about the extent of the duties that theplatform must fulfil. The OHS Act would impose obligations on a platform business to ensure, so
far as is reasonably practicable, that the workplace is safe and without risk to health in relation tomatters over which the platform business has management or control. (IRV 2020, p. 117)
While model WHS laws make clear that the primary duty of care is not limited to ‘any particular
relationships’, the next review of model WHS laws will also provide an opportunity to identify
recommended changes if needed to address WHS risk specific to platform work.
The previous review of model WHS laws (Boland 2018) recommended:• continuous assessment of new industries, hazards and working arrangements (Recommendation 3)• development of a new model Code on the principles that apply to duties (Recommendation 5).
In response to these recommendations, Safe Work Australia is developing guidance materials on
principles applying to WHS duties and consultation relating to platform work (Safe Work Australia, pers
comms, 28 October 2022).
Platforms’ obligations under State legislation and from state-based regulators
Platforms may also have obligations imposed by State WHS legislation and regulators. For instance,
New South Wales introduced legislation in July 2022, which requires food delivery platforms to provide
personal protective equipment (PPE) (meeting Australian standards) and to provide onboarding andinduction training. Food delivery platform workers are also required to wear the provided PPE whileworking, to complete training, and maintain a record of completion.
In New South Wales, the Point to Point Transport Commission regulates ridesharing (as well as taxis and hirevehicles). Although there are no national fatigue laws relating to rideshare drivers, the Point to Point
Commissioner considers that service providers (rideshare platforms) are required to have oversight of fatigue
through fatigue policies and an effective fatigue management system under NSW laws (Wing 2021, pp. 9–10).
Platforms can improve WHS systems and controls
SafeWork NSW and Transport for NSW created a Joint Taskforce on Food Delivery Rider Safety incollaboration with major platforms and Domino’s, following the death of four food delivery workers in
New South Wales in late 2020 (SafeWork NSW 2020). The Joint Taskforce published a report withrecommendations on WHS (2021, pp. 12–13) and published an Industry Action Plan where participants
committed to platform-specific initiatives that would improve the safety of food delivery workers, forinstance, better application design to reduce distractions while on the road.
A number of platforms have created worker safety groups, which can help bridge the generally limited
contact between platform representatives and workers outside of the platform acting as an intermediaryto allocate or to assist in task matching or when there is an incident or dispute.
For food delivery platform work, local governments may also have a role with urban planning andimproving safety for ridesharing and food delivery platform work.

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What personal injury insurance arrangements do platform workers
have?
Access to personal injury insurance depends on whether a platform work is an employee or contract platformworker. Platform workers who are employees, such as Hireup disability support workers, can lodge workers
compensation claims. They may also have access to other support from their employer as part of meeting
WHS obligations. For example, Hireup stated that it engages rehabilitation consultants to assist injured
disability support employees and that it investigates ways that injured employees can modify their disability
support work. Beyond those platform workers who are employees, the presumption is that many workers will
not be covered.106 A limited set of independent contractors are covered under ‘deemed worker’ provisions inworkers compensation legislation, although coverage differs by state and territory.107
While in principle, platform workers could take out their own personal injury insurance or income replacement
insurance, they typically lack the buying power of platforms that benefit from economies of scale, do nothave the capacity to limit the overall risk of the working environment to obtain lower premiums, and may not
be able to afford the premiums. As such, their insurance arrangements will depend on the platform, as well
as workers’ risk appetite and financial means.
Some platforms provide commercial insurance, while other platforms require the worker to separately
purchase a specified level of insurance, or state that purchasing insurance is voluntary with the onus on theworker to purchase insurance either through the platform or an external insurance provider if they wantcoverage. For instance:• Doordash, Menulog and Uber Eats are signatories108 to the National Food Delivery Platform Safety
Principles — created by initial signatory platforms with Ai Group — which states that signatories will provide‘free, automatic insurance protections that cover delivery workers for accidental injuries that arise while
delivering on food delivery platforms’ (Ai Group 2021). Hungry Panda has also signed up to the Safety
Principles, though they are not an initial signatory to the Safety Principles (NSW Government 2022, p. 1).
• Mable, an aged care and disability support platform, states that work arranged through the platform
includes liability, medical malpractice and personal accident cover arranged by Mable through aninsurance broker (sub 152, p. 2).
The personal injury and liability risks from some types of platform work involving automobiles may bepartially covered through compulsory third-party (CTP) insurance, which is a legal requirement to register avehicle. In some states, drivers are required to purchase their own CTP insurance from insurers, while inothers, CTP insurance is bundled with the payment of vehicle registration fees. However, some forms of CTP
insurance explicitly exclude coverage for commercial activities, such as ridesharing and food delivery,

106 For instance, the NSW State Insurance Regulatory Authority (2021a, p. 5) stated that there was a ‘general view that people

providing food delivery platform economy services are, in most cases, not likely to be covered by the [NSW’s workers
compensation] scheme’. There is only a limited body of case law (Safe Work Australia 2021b, p. 11). One exception related toa case in June 2022, in which an insurer operating as an agent for NSW’s workers compensation scheme ruled that a fooddelivery worker was engaged by Hungry Panda (a platform) as an employee at the time of his death. As such, the worker’s
family was eligible for the lump sum death benefit of $834,000 payable under workers compensation (Bonyhady 2022). Some
commentators have suggested that the decision may open the door to more platform workers being eligible for workers
compensation, although eligibility would depend upon specific working arrangements.
107 For instance, in New South Wales, those meeting the criteria specified in Schedule 1 of Workplace Injury
Management and Workers Compensation Act 1998 No 86 (NSW).
108 Deliveroo was an initial signatory but exited the Australian market in November 2022.
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although workers could choose to add additional coverage for commercial activities through different
insurance products, albeit with a higher insurance premium.

Evaluating the risks of types of platform work to contract platform workers
Policymakers will need to consider the risks that workers face during platform work — including theprobability and severity of risks and the history and number of incidents, injuries and fatalities by types ofplatform work, taking account of safety and risk management systems that platforms have in place. Specificaspects of the platform business model are likely to influence the type and degree of risk involved, as well as
the potential solutions.
• Vertical platforms that have more control over assigning tasks to workers and price setting have greater
ability to reduce risk through app and task design — particularly where the platform’s application is directly
used by workers and is active during the completion of tasks.
• Some platform work is conducive to multi-apping, which could increase risk where it results in greater timepressures. For instance, during a ‘shift’, food delivery platform workers may search for tasks on different
apps and may be able to complete or progress deliveries from multiple apps simultaneously where they
are on concordant routes. A multi-apping food delivery platform worker may also interact more often with
their phone (for instance, to accept orders and view directions on a map) in traffic.
Data will be important to quantifying risk. However, there is little publicly available data on safety outcomes
and incidents, bar what is provided by platforms to various government inquiries on request (by nature,
one-off) and the data that must be provided to WHS regulators to meet regulatory requirements (and then,what is later published by regulators). For instance, in Victoria, a ‘notifiable incident’ to Commercial
Passenger Vehicles Victoria for ridesharing includes incidents involving the death or serious injury of any
person or if a police officer or health professional is in attendance.109
Safe Work Australia stated that there were limited datasets detailing safety outcomes for platform work (SafeWork Australia 2021a):• The ABS work related injuries and illness survey, which is published every four years. However, it canhave high sampling errors as most workers across Australia do not experience a work-related injury orillness within the survey period. There is little ability to disaggregate to platform work (and to types ofplatform work) due to the sample size.
• National workers compensation data compiled by Safe Work Australia about serious injuries largely
excludes contract platform workers, the vast majority of whom are not eligible for workers compensation
as they are non-employees.
• From 2019, Safe Work Australia’s work-related traumatic injury fatality data includes platform drivers who
were fatally-injured at work, but does not contain data about non-fatal injuries (Safe Work Australia, pers
comms, 21 Dec 2022).
Platforms have more detailed proprietary data, including usage data from both workers and consumers,
incident reporting (including successful and unsuccessful commercial insurance claims) and feedback fromplatform-formed safety groups. Worker representatives may also have information on safety that is not visible
to the platform, because of the generally limited contact between platforms and workers outside of assigningtasks, resolving disputes or communicating through platform-formed worker safety groups. Insights fromthese types of data can be used by platforms to reduce hotspots of risk within their platforms. That said,

109 Under s.7 of Commercial Passenger Vehicle Industry Regulations 2018 (Vic)167

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some platforms do not have a systematic mechanism to collect injury data where such injuries or incidents
fall outside of the scope of coverage of insurance policies.
Another approach may be to directly survey platform workers, drawing on a sufficient sample. For instance,
NYC’s Department of Consumer and Worker Protection collected data on occupational injuries (and on work
expenses) through a survey distributed to all food delivery platform workers in NYC in the last quarter of2021, using worker contact details collected from platforms (NYC Consumer and Worker Protection 2022,
pp. 24–25). The survey concluded that food delivery platform workers on e-bikes and mopeds had thehighest non-fatal injury rate of 32 days away from work per 100 full-time equivalent workers, followed by fooddelivery platform workers using cars, with a rate of 12.2 days away. These rates were higher than related
occupations in the United States — couriers and messengers (2.2 days) and driver/sales workers (2.1 days)— and were higher than that of nursing assistants (10.2 days) and construction laborers (2.1 days).110
Policymakers should improve data collection on accidents and injuries for platform workers, including
strengthening reporting to WHS regulators and clarifying what incidents are ‘notifiable occurrences’ by law.
Better data will better inform WHS regulators about areas where safety outcomes can be improved.

Personal injury insurance is less generous than workers compensation
If offered at all, alternative forms of insurance provided by platforms or personal injury purchased by a worker
are typically less generous than workers compensation (Safe Work Australia 2021b, p. 9).
Workers compensation generally allows workers to claim the full or partial cost of approved medical
treatments (which can include treatments and appointments from medical practitioners and allied health,such as physiotherapy) and to access some reimbursement of medical expenses (‘provisional expenses’)
while the claim is investigated (SIRA 2022a). In comparison, alternative forms of insurance are generally
lump sum payouts, with the payout value depending on the type of injury and loss of bodily function and by
insurance policy. Where alternative forms of insurance do provide income replacement, this is generally
short term and at a smaller amount compared with workers compensation.
The lump sum death benefit — is generally higher under workers compensation compared with personal
injury insurance provided by platforms. For instance, as of October 2022, the lump sum death benefit under
the NSW workers compensation scheme is $871 200 and is indexed twice-yearly (SIRA 2022b). As of April
2022, the death benefit under the policies arranged by Uber and Menulog were $500 000 and up to$585 000 (Select Committee on the Impact of Technological and Other Change on the Future of Work andWorkers in New South Wales 2022, p. 92).111
Moreover, most platforms consider that workers are ‘working’ only when they are actively completing a task,
not when they are logged into the platform and searching for a task. For instance, Uber in its frequently
asked questions for rideshare in the United Kingdom — where Uber drivers are legally considered ‘workers’,
an intermediate category between employee and independent contractor — states that:
You earn the National Living Wage [the minimum wage in the United Kingdom] from the time you
accept a trip on the app to the point at which the trip is completed: this is called the engaged time.

110 Nursing assistants and construction laborers were selected as comparators by the authors on the basis that ‘nursing

assistants … have the highest rate of occupational injury in the U.S. of any major occupation’ and that construction laborers
were used as an ‘illustrative example involving well-known risks’ (NYC Consumer and Worker Protection 2022, pp. 24–25).
111 The ‘up to $585 000’ figure for Menulog is inclusive of funeral and dependant benefits. For the NSW workers compensation
scheme and for the Uber policy, funeral and dependant or spousal benefits are in addition to the lump sum death benefit.
Please visit the relevant platform’s website for the details of the most up-to-date and official wording of their insurance policies.
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Time waiting for a trip to be offered to you is not included in your National Living Wage calculation.
This is because there is no requirement to accept any trips during this period. (Uber 2022a)
Where a worker is likely to be located when task-searching depends on the nature of their work — for
instance, a rideshare worker is likely to be driving around, either on an existing task or if in a low-demand
period, without a task, while a worker searching for clerical tasks is likely to be stationary and within an officeor home setting.
Generally, personal injury insurance arranged by rideshare and food delivery platforms in Australia (whereavailable) covers workers during task completion with a short grace period after a task is completed — it
does not cover all times that a worker is online on a platform. For instance:• Uber provides personal injury insurance that starts when a rideshare driver or food delivery worker
accepts a task through the app and ends ‘15 minutes after that ride or delivery is completed or cancelled,whichever is earlier’ (Uber 2022c). At any other time, there is no coverage. There is also no coverage
under the policy in the aforementioned 15-minute period if the worker has accepted another task fromanother platform unless the worker is also completing a task for Uber (Chubb 2022).
• Menulog provides personal injury insurance that starts when a food delivery worker accepts a task andends ‘15 minutes following the completion of a Menulog delivery or if a courier or courier’s substituteundertakes any activity for remuneration unrelated to Menulog deliveries’ (Menulog nd).
The wording of insurance policies will ultimately determine what insurance obligations apply. While intraditional forms of work, a worker may only have work-related travel twice a day (to and from theirworkplace), those in ridesharing and food delivery platform work may be travelling to and from tasks, orsearching for tasks while travelling, several times in a day. Even when a worker might consider themselves
working by searching for a task while travelling in traffic, they might not be always covered by existing
insurance. For instance:• In April 2020, a NSW food delivery platform worker died as the result of a road accident and was not eligible
for insurance coverage (which would have included a death benefit of $400 000 to his family and funeral
expense coverage). While the worker was logged into the app at the time of his death, he was only coveredby insurance for 15 minutes after he had cancelled an order — his death had occurred 10 minutes after hiscoverage had lapsed under the eligibility criteria specified in the insurance policy (Begley 2021).
• In September 2020, a Victorian food delivery platform worker died as the result of a road accident(Burrows 2021b, p. 7). The time of death (and whether it was within the 15-minute window after the worker
completed their final delivery) then became relevant in determining what were the platform’s insurance
obligations (Burrows 2021b, p. 8).112
In Washington State, where rideshare drivers are eligible for workers compensation, coverage only applies
during dispatch platform time — the time ‘a driver spends traveling from a dispatch location to a passenger
pick-up location’ and passenger platform time (the time ‘when the driver is transporting one or morepassengers on a trip’).113 There is no grace period after the completion or cancellation of a trip.
In California, Article 2 of Proposition 22 requires platforms to provide ‘occupational accident insurance tocover medical expenses and lost income resulting from injuries suffered while the app-based driver is online
with a network company’s online-enabled application or platform’, not just when a platform worker is

112 The platform later offered a cash payment of $400 000 to a relative of the worker, but it is unclear from public information

provided by the platform to the NSW Select Committee on the impact of technological and other change on the future of work
and workers in New South Wales as to whether the death occurred within insurance coverage (Burrows 2021a, p. 5).
113 Engrossed Substitute House Bill 2076 (Washington State).
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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportcompleting a trip or delivery request. As such, in California, Uber pays insurance premiums for Optional
Injury Insurance coverage (while in other jurisdictions within the United States, premiums are deducted fromworker earnings at a per mile rate during engaged time if a worker opts in (Uber nd).

Some platform workers lack information about insurance provisions
Insufficient insurance levels — or lack of worker knowledge about insurance coverage — is concerning insectors where there are greater risks of harm or liability to the worker, customer or third parties that directly
results from the performance of work, which could include aged care and ridesharing and food delivery.
In a 2019 national survey of platform workers (McDonald et al. 2019, p. 46):
• 46% of platform workers report that their main platform does not offer at least one form of work-related
insurance• 26% report that they do not know whether insurance is offered• 40% of platform workers report that their main platform requires them to take out their own insurance• 22% do not know whether there is a requirement for insurance.
Even when a platform worker knows that their platform provides insurance, they may not be aware of the fulldetails of an insurance policy. There is likely to be a role for better information provision as there is nonational platform work equivalent to the Fair Work Ombudsman’s education function for employers andemployees. For instance, in early 2023 Victoria will establish a Gig Worker Support Service that will provide
information about platform conditions; maintain a list of platforms that have signed up to the voluntary
Victorian standards for platform work; and help resolve disputes by making referrals to relevant federal andstate agencies and community legal centres (Andrews 2022). The support service will also be available
through translation and interpretation services.

Improving insurance arrangements in platform work withsignificant risk
In areas of platform work that bear significant risk to workers, and where insurance provision and outcomesare lacking, there are a number of options for policy. For many platform workers, public insurance provided
through publicly-funded universal healthcare, the NDIS and social security benefits will be the major sourceof insurance, so that flaws in private arrangements mean that taxpayers bear many of the costs. Incomplete
insurance also means that non-platform businesses — engaging workers as employees — providing
services competing with platform workers may face a competitive disadvantage. The greater the risk, themore insurance benefits should approach those offered in workers compensation.
There have been various proposals to increase insurance coverage or the level of insurance for workers
providing food delivery services. The options identified by the NSW State Insurance Regulatory Authority(SIRA) (2021a, pp. 4, 6–7) for improving insurance arrangements for food delivery platform work have likely
broader applicability.114 Drawing on the SIRA proposals, there are three broad options that could informarrangements for all types of platform work, though the choice of which may vary depending on the type ofwork. The options are:114 SIRA noted that the risk profile of food delivery platform work is different from other platform work in part due to theuse of bicycles, scooters or motorcycles, as well as the time pressures involved in food delivery work. This need not limit
the application of these options to other platform work as insurance arrangements vary premiums based on risk.
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Platform work and the gig economy• to extend workers’ compensation — under workers compensation, platforms would pay premiums toinsurers with workers injured during work filing claims under workers compensation. Platforms would also
have ‘return to work’ obligations that they must fulfill• implementing an insurance scheme but not extending workers’ compensation — where there is an
insurance scheme with features of workers compensation or compulsory third-party insurance• requiring platforms to provide a baseline level of personal injury insurance — where minimum
requirements are set by a government, with platforms required to source insurance meeting the standard
for workers.
These options come with their own policy considerations (table 5.2) and are discussed in more detail in thefollowing pages — though this is not a comprehensive review given the wide scope of the Productivity
Inquiry. Any changes in policy relating to insurance arrangements should consider the demographics ofplatform workers affected (and their ability to navigate insurance claims and the legal system). For instance,
SIRA (2021a) noted that food delivery workers were more likely to be from culturally and linguistically diverse
backgrounds, have lower levels of education attainment and be temporary residents.
Table 5.2 – Considerations for insurance policy
Consideration

Workers compensation

Industry-wide scheme

Insurance baseline

Requires extension ofYes‘deemed worker’ status toclass of platform workers
in legislation (State
governments can extend
workers compensation
eligibility to some contractors
through workers
compensation legislation)

No

No

Requires a definition of a
Yes (in workers
class of platform worker to compensation legislation)
be codified in legislation,
including consideration ofmulti-apping

Yes (in legislation
establishing an
industry-wide platform work
insurance scheme)

Yes (in legislation
establishing a mandatory
insurance baseline)

Requires definition ofYes (insurer will have totime-based insuranceinterpret whether an injury
coverage for platform work that occurs after a task is
to be codified in legislation completed falls withinor insurance policy
travel-related provisions inwording (in whichstate workers compensation
timeframes are platform
legislation, additional
workers eligible for coverage) guidance may have to begiven in legislation orlegislation may require
amending)

Yes (in legislation
establishing an
industry-wide platform work
insurance scheme)

Yes (for instance, if agovernment requires that
platform insurance includes
coverage for a short periodof time after completing atask. The industry standard
in food delivery is generally
15 minutes after completion,with some exceptions withinpolicies)

Requires governments todefine level of insurance
benefits

Yes (in legislation
establishing an
industry-wide platform work
insurance scheme)

Yes (in establishingminimum standards for
insurance)

Yes (if benefits are to bedifferent than defined inexisting legislation or if
clarification is needed inlegislation)

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Consideration

Workers compensation

Industry-wide scheme

Insurance baseline

Requires platforms to meet Yes (platforms as‘return to work’ obligations employers would have(including creating a return to return to work obligations)work plan, reasonablemodifications to tasks to assista worker in their return to work)

Depends on legislation

Depends on legislation

Requires governments to No (would be subject todetermine insurance
existing workers
benefits in legislationcompensation legislation)(including the existence ofprovisional payments while aclaim is assessed)

Yes (to determine insurance
benefits and whether
provisional payments exist)

Yes (to determine what thebaseline level of insurance
would entail, including if
there are provisional
payments mandated while aclaim is processed)

Requires governments todetermine how scheme orinsurance meetinggovernment requirements
are funded

Yes (in legislation
establishing an
industry-wide platform work
insurance scheme)

No (insurance premiums
paid by platforms would bepriced by commercial
insurers, although inpractice, a government
would need to consult withstakeholders to evaluate
whether the parameters of
their chosen insurance
baseline would becommercially feasible)

Yes

No (would follow insurer’s
established dispute
resolution process —generally involving
escalation to a complaints
team, internal review orboth, before escalation to
the Australian Financial
Complaints Authority, anindustry-funded dispute
resolution scheme, before
legal proceedings)

Yes (governments would
need to maintain financial
viability of workers
compensation scheme)

Requires governments to No (would follow
design a dispute resolution established workers
process relating to acompensation dispute
denied insurance claim
resolution processes, which
involve conciliation andarbitration processes before
legal proceedings)

The system of workers compensation in Australia emerged and evolved during the 20th century — wellbefore the advent of platform work. As such, any consideration to extend workers compensation would
require that legislation be examined so that it is fit-for-purpose (such as how a measure of pre-injury average
weekly earnings is calculated accounting for the potential of high variability in earnings over the span ofweeks or months in some forms of platform work).
Furthermore, WHS matters have traditionally been considered as primarily state and territory responsibilities.
WHS regulators are largely state-based, the model WHS laws are implemented through state legislation andwith the exception of Comcare, workers compensation schemes are operated at a state level. As there aredifferences between states for insurance requirements and workers compensation eligibility, a problem frommoving to better coverage through state-based WHS arrangements would be inconsistencies in thetreatment of workers undertaking the same tasks and facing the same risks. This would create somecompliance burdens for platforms.
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Platform work and the gig economy

One approach that could create a nationally consistent approach would be the use of mirror laws by states if
all (or most) states agreed to a consistent approach to insurance for high-risk platform work, such as fooddelivery, similar to how model WHS laws already apply across all jurisdictions bar Victoria.

Defining classes of platform workers for insurance purposes
As there are no insurance requirements in the IC Act and as most contract platform workers are not currently
eligible for workers compensation, any changes to require an insurance baseline, creating an industry-wide
insurance scheme or extending workers compensation eligibility requires that there be a precise definition ofclasses of platform workers to avoid boundary issues with non-platform contract work. In the case of anindustry-wide scheme or extending workers compensation, policymakers need to consider overlaps withother types of platform work if it is possible to simultaneously complete or progress more than one type oftask (for instance, ridesharing and food delivery).
Legislating regulating platform work has involved codifying definitions of platforms and workers.115 Platform
definitions often reference the online nature of task assignment and the type of tasks dispatched by a platform,
with platform workers being defined in reference to platforms. For ridesharing, legislation may clarify that taxi
services and limousine hire are not within scope of regulation when they are regulated separately.

What level of insurance benefits should be available?
If workers compensation were to be extended, the benefits available to a platform worker would follow thatprescribed by existing legislation. Policymakers would also need to consider how income from othercontracting platform work — in work that is not eligible for coverage under a state’s workers compensation
scheme — is treated for the purposes of calculating an average measure of pre-injury average weekly
earnings. Otherwise, governments would need to determine what level of insurance benefits are sufficient —either in mandating a baseline level of insurance or in creating an industry-wide insurance scheme —including whether (and to what extent):
•
•
•
•
•

lump-sum benefits are provided for fatalities (including death benefits and funeral expenses) and injuries
medical expenses are reimbursed
there are limits on out of pockets expenses
there is an income replacement scheme
there are payments to a worker’s dependants upon death.

An industry-wide insurance scheme that differs from workers’ compensation will also need to consider how
provisional payments work while the claim is being processed and in turn, performance targets for the time ittakes to process a claim. For instance, in New South Wales, after receiving initial notification of an injury
under workers compensation, insurers must start provisional payments within 7 days unless there is areasonable excuse not to (SIRA 2021b).

Under workers’ compensation, platforms would have ‘return to work’ obligations
Under an extension of workers compensation, there are return to work obligations for organisations engaging
or employing deemed workers, although these obligations vary by state. These obligations include making apersonalised return to work plan for injured workers and investing work modifications for injured workers (forinstance, if light duties are available). At an organisational level, it may mean appointing a return to work
115 For instance, as defined in Ontario’s Digital Platform Workers’ Rights Act 2022 (broad regulation of platform work),

New York City’s high-volume for hire services in subchapter 59D of the Rules of the City of New York (ridesharing) andsubchapter 2 of chapter 15 of title 20 of the administrative code of New York City (food delivery platform work) andWashington State’s Engrossed House Bill 2076 (ridesharing).
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coordinator and creating and publicising a return to work strategy or program. For instance, in New South
Wales, Tier 1 organisations — which some platforms could be categorised even based on the number ofexisting employees — must consult workers and any unions that represent them during the creation of the
return to work program (SIRA 2022c).

Financial viability of an industry-wide insurance scheme or extending workers
compensation for classes of platform work with significant risk
The financial viability of creating an industry-wide insurance scheme or to extend workers compensation fora class of high-risk platform work — such as food delivery — would need to be considered, particularly in
how premiums are priced, given differences in platform work. Some platform workers will work the equivalentof full-time hours, while others may only work a few hours. One proposal considered by the
NSW Government in 2021, which has not been enacted, was to fund an insurance scheme for food delivery
workers through imposing a levy of about 4% on each eligible platform transaction — though the levy could
have varied ‘depending on the service or platform’ (Cormack 2021).
In designing an insurance scheme, policymakers would need to consider (SIRA 2021a, p. 7):• the relative costs and benefits associated with private or public underwriting• the ability to implement principles of insurance pricing, such as risk-based pricing, risk pooling, pricestability, and to encourage risk management by parties with the aim of lowering future claims (referred toas ‘good claims performance’)• the ability to accurately price insurance premiums or levies to reflect risk in specific platform work
• the interactions of a proposed scheme with existing public and private insurance schemes• additional administration costs — for instance, if a government were to create a separate industry-wide
insurance scheme for classes of platform workers.
Though not direct comparators for Australian cities, examples of funding arrangements for workers
compensation funding for ridesharing include:• in New York State, where high-volume rideshare platforms pay into the Black Car Fund, a workers
compensation fund for the taxi, limousine hire and ridesharing industry. In June 2022, Uber stated that
trips in New York incurred a surcharge of 3% to pay for workers compensation (Uber 2022b)• in Washington State, rideshare platforms pay into the state’s workers compensation fund. The premiums
paid by businesses are determined by a formula involving a base rate, the number of hours worked, andrisk and experience ratings (Washington State Department of Labor & Industries 2020).

Dispute resolution for denied claims in an industry-wide insurance scheme
Governments would need to consider the desirable dispute resolution processes for any industry-wide
insurance scheme. Under Comcare and state-based workers compensation schemes, there are review andconciliation processes that a worker can elect to use before pursuing their claim through court (or througharbitration processes, where they exist). For instance, in Victoria, conciliation involves the WorkCover agent,
the employer and the worker who meet in a conference with a Conciliation Officer to attempt to resolve thedispute. If a Genuine Dispute Certificate is provided after an unsuccessful conciliation conference, theworker can apply for binding arbitration by the Workplace Injury Commission — which in limited
circumstances, can be appealed to the Supreme Court of Victoria — or to initiate court proceedings.
Under commercial insurance arrangements, if a claim is denied there are generally internal complaint anddispute resolution processes that a worker can use to appeal a denied claim. If unsuccessful, a worker canescalate a dispute about a denied claim to the Australian Financial Complaints Authority (AFCA) (an external

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Platform work and the gig economy

dispute resolution body for the financial services industry) with powers to offer a binding determination to theworker, if conciliation fails. Otherwise, if a worker disagrees with the binding determination proposed by
AFCA, they can pursue the claim through court.

Recommendation 7.19
Evaluate insurance arrangements for platform work with significant risks to workers
Governments should evaluate insurance arrangements of classes of platform work where there are
significant risks to worker safety, drawing on data and consultation with platforms, workers and theirrepresentatives. Classes of platform work that are likely to be of initial interest are those with many
workers or total hours worked and those where there are material risks to work health and safety.
Where insurance arrangements are insufficient, governments should consider at minimum mandating abaseline level of insurance to be provided and paid for by platforms, or creating an industry-wide
insurance scheme, or extending workers compensation. Each of the policy options would be best fundedby the covered platforms. The appropriate policy option will depend on the class of platform work and its
risks, and implementation considerations such as the existing level of insurance provided by platforms andthe financial sustainability of the scheme.

175

Appendix

Appendix177

Stylised simulations of economy-wide effects

A. Stylised simulations of
economy-wide effects

The Productivity Commission used a whole-of-economy model to illustrate the potential effects of some of
the recommendations in this report in a stylised way. This model is static, in that it does not capture dynamic
effects over time. Rather, the results are interpreted as if the effects of a shock to the economy could happen
overnight. While the simulations are stylised and there is a high level of uncertainty in the impacts of the
proposed recommendations and other model assumptions, the simulations provide insight on how potential
productivity improvements could flow through the economy’s structure and the differential impacts acrossindustries and household types. Further details of the model, simulations and effects of sensitivity testing arecontained in volume 9.

Improving matching of permanent skilled migration116
While migrants are not separately identified as an individual labour type in the whole-of-economy model used inthis inquiry, the effects of better matching permanent skilled migrants to jobs were simulated in a stylised way byincreasing labour productivity in industries based on the extent to which they employ skilled migrants. The
composition of the population (in terms of age group, sex and education level) in the simulation stayed the same
— the assumption is that the size and composition of the permanent migration intake does not change, but theskills of migrants can be better utilised in the industries they are employed in. Industries employing a relatively
higher share of workers with permanent skilled visas received a larger productivity improvement, with simulated
labour productivity increases (relative to baseline labour productivity) of:• 0.1% for ‘construction’, ‘retail trade’, ‘hospitality’, ‘school education’, ‘public administration’, ‘other services’• 0.2% for ‘mining’, ‘other manufacturing’, ‘transport and wholesale’, ‘financial services’, ‘professional,
scientific and technical services’, ‘health and social services’• 0.3% for ‘advanced manufacturing’, ‘technical, vocational and tertiary education’• 0.6% for ‘technology and telecommunications’.
The change in prices relative to the economy-wide consumer price index (CPI) varied across the different
industries. Industries with larger simulated labour productivity increases (including ‘advanced manufacturing’,‘technology and telecommunications’, and ‘technical, vocational and tertiary education’) were better able toproduce more output with the same amount of labour, and therefore experienced the largest reduction in
their relative output prices (figure A.1, panel a). In some other industries with smaller simulated labour
productivity improvements, the effects of increased demand (discussed below) on prices outweighed pricefalls from the increase in labour productivity, which led to a relative increase in prices.
Real output increased across these industries as the relative price changes induced greater demand. Real
output increased across other industries as well, including those that did not experience a simulated
productivity improvement (figure A.1, panel b). The overall demand increase across industries was due to
116 Referred to as simulation 7 in volume 9.

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Volume 7 - 5-year Productivity Inquiry: A more productive labour market Inquiry reportfactors such as higher household incomes (elaborated on below), the need for more capital for production(and hence investment), and an increase in government expenditure (which was tied to the size of GDP).
Real GDP and real gross national income increased by about 0.2% in the simulation. There was highuncertainty about the size of the effects; for example, sensitivity testing found that the increase in real GDP
ranged from about 0.1 to 0.3% with changes to assumed shock sizes (chapter 4 in volume 9).
Figure A.1 – Estimated changes in output prices and real output by industry due toimproved matching of permanent skilled migrationa
b. Real output

a. Output prices relative to CPI

0.30

0.04
0.02

0.25

0.00
% change% change

-0.02
-0.04
-0.06
-0.08
-0.10
-0.12

0.20

0.15
0.10
0.05

-0.14
AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG

0.00

-0.16

a. Industry abbreviations: AGRICU – agriculture, forestry and fishing; MINING – mining; ADVMAN – advanced manufacturing;
OTHMAN – other manufacturing; CONSTR – construction; TRANWH – transport and wholesale; RETAIL – retail trade;
HOSPIT – hospitality; TECTEL – technology and telecommunications; FINSVC – financial services; PRFSVC – professional,
scientific and technical services; SCHOOL – school education; VETUNI – technical, vocational and tertiary education; HLTHSS– health and social services; PUBADM – public administration; OTHSVC – other services; DWELLG – ownership of dwellings.
Source: Productivity Commission estimates.

Although the industries with larger simulated productivity improvements required less labour, overall labour
use in the economy was largely unchanged as workers were redeployed across other industries thatexperienced growth in demand. In the migration context, the simulation implies that more productive
migrants in certain industries displace other workers, but the subsequent effects of these productivity
improvements on demand and economic growth mean that displaced workers find employment in otherindustries (abstracting from skill or location mismatches that may occur in reality and take some time toresolve). This displacement occurs because there is no differentiation between migrant and local workers inthis model, so the two are perfectly substitutable, given the same age, sex and education characteristics.
However, if migrant workers were considered complementary to local workers rather than substitutes (forexample, due to different knowledge and skillsets that complement the skills of local workers), thenincreased productivity of migrant workers in a particular industry may lead to increased demand for local
workers in that industry as well.117

117 The Productivity Commission’s Migrant Intake into Australia inquiry (PC 2016b, p. 191) suggested that at an aggregate level,taking together supply and demand effects, the addition of new migrants to Australia’s population have had a negligible impact on

180Stylised simulations of economy-wide effects

The overall increase in demand for labour increased real average wage rates (that is, wages relative to theeconomy-wide CPI) in the economy. Higher real household labour and capital incomes (which more thanoffset increased household saving and income taxes), contributed to higher household consumption andimproved wellbeing. These effects were seen across people of different age groups, genders and educationlevels. The aggregate value of the wellbeing improvement was estimated to be worth about $1.7 billion in
2018-19 dollars to households.

Reducing unnecessary occupational licensing requirements118
Reducing unnecessary licensing requirements would improve labour mobility and therefore enable better
matching of jobs to people with the most suitable skills for the role. The impacts of this change were
simulated by increasing labour productivity in the model. While occupational licensing affects occupations
rather than industries, the limitations of the model’s structure meant that the labour productivity
improvements could only be simulated by industry. The simulated labour productivity improvements wereapplied to industries that are most likely to have occupational licensing requirements, and hence would
benefit most from reducing unnecessary ones. In the simulation, it was assumed that each unit of labour(measured by hours worked) in the ‘construction’, ‘transport and wholesale’, ‘professional, scientific andtechnical services’, ‘school education’ and ‘health and social services’ industries was 0.8% more productive.
Improving labour productivity in the simulated industries led to a fall in labour hours required to produce thesame amount of output in those industries. This contributed to a reduction in prices of those industries’
goods and services relative to the economy-wide CPI, with the greatest reductions in the mostlabour-intensive industries (figure A.2, panel a).
The relative price falls induced greater demand in industries that experienced improved labour productivity.
Output also increased more broadly across the economy, including in industries that did not directly experience
an increase in labour productivity (figure A.2, panel b). This was due to growth in real household incomes, theneed for more investment to meet greater demand for capital in all industries, and growth in government
expenditure (which was tied to GDP). Real GDP increased by 0.3% and real gross national income increased
by 0.4%. Sensitivity testing found that the change in real GDP ranged from 0.1 to 0.7% under changes toassumed shock sizes, demonstrating the uncertainty in these effects (chapter 4 in volume 9).
Hours worked in the industries with simulated productivity increases fell, but hours worked in industries that
did not have a simulated increase in labour productivity increased due to greater demand. The net effectacross all industries was such that total hours worked was largely unchanged. Falls in labour hours werelargely for groups aged 65 and over, who chose to spend more time on leisure — labour supplied by theseolder age groups were calibrated in the model to be more responsive to income changes than other age
groups. Hours worked among all younger age groups increased on average.
Across all groups, real disposable incomes increased (as real labour and capital income increases exceeded
increases in saving and income tax), and households were able to consume more. The combined effects ofgreater consumption and increased leisure time for older groups meant that household wellbeing improved for all
age groups, genders and education levels. The aggregate value of the increase in household wellbeing was

wages, employment and participation of the existing labour force. The size of migrant spillover effects on the productivity of local
workers (which could arise from transfers of knowledge and exposure to new opportunities) were uncertain but likely small.
118 Referred to as simulation 6 in volume 9.
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estimated to be about $3.3 billion in 2018-19 dollars (that is, if this amount was given as extra income instead of
the productivity shock, households would be as well off as they were estimated to be after the productivity shock).
Figure A.2 – Estimated changes in output prices and real output by industry due toreducing unnecessary occupational licensinga
b. Real output

0.2

0.7

0.1

0.6
0.5

% change

0.0

-0.1
-0.2

0.4
0.3

-0.3

0.1

-0.4

0.0

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG

0.2

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG% changea. Output prices relative to CPI

a. Industry abbreviations: AGRICU – agriculture, forestry and fishing; MINING – mining; ADVMAN – advanced
manufacturing; OTHMAN – other manufacturing; CONSTR – construction; TRANWH – transport and wholesale; RETAIL– retail trade; HOSPIT – hospitality; TECTEL – technology and telecommunications; FINSVC – financial services;
PRFSVC – professional, scientific and technical services; SCHOOL – school education; VETUNI – technical, vocational
and tertiary education; HLTHSS – health and social services; PUBADM – public administration; OTHSVC – otherservices; DWELLG – ownership of dwellings.
Source: Productivity Commission estimates.

There are some limitations to the approach of modelling reduced occupational licensing requirements byincreasing labour productivity in specific industries. It is likely that there are some occupations that would be
affected by occupational licensing changes that are not covered by these industries. Conversely, some
occupations in these industries would not be affected by these changes.
In addition, modelling only increases in industry labour productivity abstracts from other effects that could
arise from removing unnecessary occupational licensing requirements. As discussed in chapter 3, licencerequirements can also lead to wage premiums and reduce the equilibrium labour supply in affectedoccupations. These effects were not modelled under this simulation as the inquiry’s whole-of-economy
model does not contain industry- or occupation-specific wages, with labour assumed to be perfectly mobile
across industries. Sensitivity analysis of the effects of simulated productivity improvements in the presenceof economy-wide wage floors and unemployment suggest that there could be greater gains in labour hours
and production (discussed in chapter 4 in volume 9).

Reforms to awards and enterprise bargaining
Reforms to awards will allow significantly greater scope for flexibility in workplaces, reinforced by changes to themodern awards objective, which explicitly references productivity as a goal. Award changes reverberate across allother types of workplace relations as they form the minimum standards for many industries or occupations. To
that extent, award reforms act to increase efficiency of labour markets across the whole economy. Independently,

182

Stylised simulations of economy-wide effects

changes in bargaining arrangements, especially changes to the better-off-overall-test and closer scrutiny of any
clauses to agreements that overly restrict management’s investment or other key business decisions will also
improve productivity and encourage the uptake of enterprise bargaining.
Given the general impacts of workplace reform across the economy, the appropriate shock is a general shock tolabour productivity, as modelled for the very long run reforms of the schooling system (in appendix B fromvolume 8).119 It is unlikely that the workplace relations reforms proposed in this review will produce the same
productivity improvements, so the results for school reform should be scaled down. Assuming a scaling factor of
between 0.10 to 0.25, the gains to real GDP would be of an order between 0.2 and 0.5 percentage points.
The Productivity Commission’s 2015 report (PC 2015c) was a broader review of the entire workplace
relations system compared with the tighter focus of this report. The 2015 report raised other potentialchanges to workplace relations in relation to industrial action, adverse action, unfair dismissal, governancearrangements, greenfield agreements, and individual flexibility agreements, among others. These changes
would produce some additional benefits.

119 Referred to as simulation 5c in volume 9. This simulation assumed a 2% labour productivity improvement across the

population, and an additional 3% labour productivity improvement in the ‘school education’ industry. The estimated real
GDP effect of 2% was predominantly due to the former.

183

Abbreviations

Abbreviations
ABS

Australian Bureau of Statistics

ACCC

Australian Competition and Consumer Commission

ACCI

Australian Chamber of Commerce and Industry

ACTU

Australian Council of Trade Unions

AFCA

Australian Financial Complaints Authority

AHPRA

Australian Health Practitioners Regulation Agency

Ai Group

Australian Industry GroupAMR

Automatic mutual recognition

ANMAC

Australian Nursing and Midwifery Accreditation Council

ANZSCO

Australian and New Zealand Standard Classification of Occupations

ANZSIC

Australian and New Zealand Standard Industrial Classification

API

Application programming interface

ASIC

Australian Securities and Investments Commission

ASU

Australian Services Union

ATO

Australian Taxation Office

BCA

Business Council of Australia

BIIP

Business Innovation and Investment program

BLADE

Business Longitudinal Analysis Data Environment

BOOT

Better Off Overall Test

CBA

Cost-benefit analysis

CCA

Competition and Consumer Act, 2010 (Cth)CEDA

Committee for Economic Development of Australia

CFMEU

Construction, Forestry, Maritime, Mining, and Energy Union

COVID-19

Coronavirus disease (an infectious disease caused by the SARS-CoV-2 virus)

CPD

Continuous professional development

CSAM

Continuous Study of Australian Migrants

CTP insurance

Compulsory third party insurance

DEWR

Department of Employment and Workplace Relations

EA

Enterprise agreement

ECEC

Early childhood education and care

EMTR

Effective marginal tax rate

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EV

Electric vehicle

FDI

Foreign direct investment

FTAFree trade agreement (also referred to as a preferential trade agreement)

FW ActFair Work Act, 2009 (Cth)FWC

Fair Work Commission

FWCFB

Full Bench of the Fair Work Commission

FWO

Fair Work Ombudsman

GBE

Government Business EnterpriseGDP

Gross Domestic Product

GFC

Global Financial Crisis

GP

General practitioner

HILDA

Household Income and Labour Dynamics in Australia

IT

Information Technology

IC ActIndependent Contractors Act 2006 (Cth)ICTInformation and Communication Technology

IPART

Independent Pricing and Regulatory Tribunal

MADIP

Multi-Agency Data Integration ProjectMBS

Medicare Benefits Schedule

NCC

National Construction Code

NDIA

National Disability Insurance Agency

NDIS

National Disability Insurance Scheme

NES

National Employment Standards

NMBA

Nurses and Midwifery Board of Australia

NP

Nurse practitioner

NRAS

National Accreditation and Registration Scheme

NYC

New York City

OBA

Outcomes-based assessment

OECD

Organisation for Economic Co-operation and Development

OER

Occupational entry regulation

OSAP

Offshore Skills Assessment Program

OHS

Occupational Health and Safety

PBS

Pharmaceutical Benefits Scheme

PC

Productivity Commission

PCBU

Person conducting a business or undertaking

RAC

Refrigeration and air conditioning

RIS

Regulatory impact statement186

Abbreviations

RegtechRegulatory technology

SCHADS Award

Social, Community, Home Care and Disability Services Award

TSS

Temporary Skill Shortage

TSMIT

Temporary Skilled Migration Income Threshold

TWU

Transport Workers’ Union

TTMRA

Trans-Tasman Mutual Recognition Agreement

UFCW

United Food and Commercial Workers Canada

UK

United Kingdom

UN

United Nations

UNESCO

United Nations Educational, Scientific and Cultural Organization

US

United States

UTI

Urinary tract infection

WHS

Workplace Health and Safety

WR

Workplace Relations

WWCC

Working With Children Check187

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197

Report no. 100 – 7 February 2023

Ave

5-year Productivity Inquiry:
From learning to growth
Inquiry report – volume 8i5-year Productivity Inquiry: From learning to growth Inquiry report

The Productivity Commission acknowledges the Traditional Owners ofCountry throughout Australia and their continuing connection to land,
waters and community. We pay our respects to their Cultures, Country
and Elders past and present.

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Media, Publications and Web | phone 03 9653 2244 | email publications@pc.gov.au

Contents

Contents
Prefaceiv

1.

The value of human capital1

1.1

Education is vital for productivity2

1.2

What skills are necessary for Australia’s future workforce?

8

1.3

The education sector context

12

Building productivity in schools

19

2.1

Lifting productivity in a stretched system

20

2.2

Working smarter to improve student outcomes

26

2.3

Shaking up how schools operate

42

Investing for future skill needs

51

3.1

Meeting demand for a more educated workforce

54

3.2

Improving governments’ subsidy allocations

64

3.3

Setting prices based on efficient costs

75

3.4

Harmonising loan settings to increase access to tertiary education

80

3.5

A culture of lifelong learning for an agile workforce

85

Boosting learning outcomes for tertiary students

93

4.1

How big are the quality problems facing higher education?

95

4.2

Leveraging information to promote quality

103

4.3

Rewarding and spreading best practice teaching

111

4.4

Supporting retention and completion

117

4.5

Teaching for adaptive skill needs in VET

126

2.

3.

4.

Appendices

133

A.

A mixed story — performance of higher education

135

B.

Stylised simulations of economy-wide effects

143

Abbreviations

151

References

153

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iii

5-year Productivity Inquiry: From learning to growth Inquiry report

Preface
Australia thinks of itself as a country rich in mineral resources. But, arguably, Australia’s most valuable
resource is its 26 million brains. With them we understand and use technology (from here and overseas),develop ideas and technology of our own, perform skilled work, manage our teams better, and improve ourservice delivery. The resources to thrive in the coming decades will necessarily come from our ideas, andfrom making the best use possible of them in our economy.
This is a challenge at a time when technology is transforming the nature of work. There has been a strong
decline in the share of routine jobs over the past thirty years, particularly manual routine jobs, and anincrease in non-routine cognitive work.
The reduction of routine tasks means that most workers will need a basic skill level to adapt to jobs that havecomplex demands. And it will be increasingly valuable to develop high-level skills, both for the economy andthe individuals concerned. A large share of new jobs created in the next five years will require tertiary
qualifications, and of these the majority will require university qualifications; the trend is likely to continue.
White-collar work will not be immune from the changes brought about by digital technologies and artificial
intelligence. Most people will need to learn new skills in an ongoing way to avoid obsolescence, and to find a
new occupation if necessary.
Developing foundational skills at school is vital in this context. Young people who graduate from school
without foundational skills will find it increasingly difficult to find secure work. One fifth of Australians haveinsufficient basic literacy and numeracy, and risk being marginalised and excluded from job markets.
Foundational skills are also essential for continuing successfully to tertiary education, and for being able tolearn new skills later in life. Yet increases in funding for schools in the past decade have not correspondedwith improved results. If anything, a larger share of students is falling behind, particularly in numeracy. The
implications for inequality are profound.
There are several promising tools for improving outcomes in schools. Giving teachers access to high-quality
teaching materials reduces the variation between schools and frees up teachers to focus on better teaching.
So does developing a systematic body of research on what works in the classroom and ensuring its
adoption. Reducing the administrative burden on teachers provides more time for student support andimproves retention of teachers. Digital technologies may support students falling behind or taking a subject
outside of the scope of training of teachers in their school. Innovative new models (in terms of hours,
governance or modes of delivery) may help reach disengaged students or provide new routes to excellence.
For vocational education and training (VET), and for universities and other higher education providers,
the rise of non-routine work and the explosion of high-skill jobs has implications for the quantity and quality ofeducation needed. The Productivity Commission is advocating a cautious and gradual expansion ofincome-contingent loans to all career-oriented VET courses, starting at the Diploma level, so that more
students can continue their studies after high school. The Commission also advocates for a return to ademand-driven university system, to meet growing demand and eliminate the distortions caused by funding
caps for universities. Accompanied by recommended changes in the funding model to limit the fiscal cost ofsuch a transition. Giving more students access to higher education is beneficial for them and the economy.

iv

Preface

However, there are limits to the effectiveness of a quantity-driven strategy. Improvements in the quality ofcritical thinking and the relevance of the technical skills taught are sorely needed. Without these, skill shortages
will persist, and firms will lack the new ideas and technical knowledge to deliver productivity improvements.
Satisfaction with VET and university has been mixed among graduates and employers. Course content in
VET is slow to adapt. Incentives for universities to improve their teaching are weak. More needs to be done
to promote quality teaching and leverage the opportunity presented by the ongoing shift online, which has
been accelerated by the COVID-19 pandemic.
Most countries struggle with the challenge of improving the quality of tertiary education teaching. Students
choose based on reputation and considerations such as location, with little information on teaching quality.
Properly assessing and rewarding lecture delivery and quality materials is costly and can be gamed. But
what information is out there can be leveraged more effectively: university lectures could be made freely
accessible, survey data on VET and higher education could be expanded and made more salient to students
choosing courses, and regulators’ assessments of quality could be deepened. More study of what works andmore rewards for what works are also useful.
Beyond entry-level qualifications, Australia has much to gain from lifelong learning. Keeping skills current,
adapting to changing roles and changing occupations will all be vital to Australia’s future productivity. In
addition to making university lectures available to all, the government should build a consolidated strategy toensure that all Australians can access learning through-out their lives and grow with the economy.
Let’s use our most precious resource well.

v

The value of human capital1.

The value of human capital

Key points
Education increases people’s capabilities — allowing them to do more or better work in the same time. It also
makes society healthier, safer, better informed, and more civically engaged, as well as fostering social mobility.
Skills developed through education, training and on-the-job experience underlie the capacity to make thefullest use of technology, generate new ideas, and apply knowledge from within Australia and from overseas.
• Rising skill levels have contributed to Australia’s productivity growth in recent decades, although it ischallenging to measure the share of growth that can be attributed directly to education.
• One in five Australians have low basic skills, which limits their job opportunities, versatility, capacity toacquire further skills, and lifetime wages. Quality education can help prevent young Australians from ending
up with low basic skills, and improve social inclusion.
As our reliance on the services sector expands, people’s capabilities (‘human capital’) will play a more
important role than physical capital in improving productivity.
• General and foundational skills will continue to underpin the workforce’s contribution to productivity, andas routine tasks are automated, newly created jobs will increasingly rely on areas such as interpersonal
skills, critical thinking, working with more complex equipment, and accomplished literacy and numeracy.
• Specific skills in areas such as data and digital technology, allied health care and community services will
be increasingly needed due to the changing composition of the economy and an ageing population.
Beyond these trends, we cannot predict many of the jobs that will emerge over the coming decades.
An adaptable system developing general capabilities as a complement to technical skills can provide
resilience to these changes.
Outcomes across schooling, VET, and higher education are reasonable but there is still room toimprove. Raising student outcomes for a given number of years of education and better matching what
is taught to emerging skill needs will be critical to Australia’s ongoing prosperity.

1

5-year Productivity Inquiry: From learning to growth Inquiry report

1.1

Education is vital for productivity

Education is vital in developing ‘human capital’, which describes the economic and social value of a person’s
skills and experience. Investments in human capital can increase an individual’s earnings, health, capacity toparticipate in the broader community, and their ability to appreciate art and culture. Education is a primarypillar in human capital development and can improve all these outcomes. Reflecting its importance, in
2020-21 government expenditure on education totalled $116 billion (ABS 2022c). This volume of the inquiry
focuses specifically on how education enables workforce productivity.
Many inquiry participants highlighted the importance of education for productivity, including those within the
sector and those with a broader interest in productivity.1 Many of these submissions remark on the role ofeducation in developing human capital and how this drives productivity growth as well as its broader value,‘providing the basis for successful engagement with the labour market and contributing to wellbeing’ and‘contribut[ing] to civic values and creat[ing] the conditions for a more informed, engaged and productive
citizenry’ (Tasmanian Government, sub. 196, p. 12; DASSH, sub. 141, p. 1).
The Productivity Commission has considered parts of the education sector in recent years (PC 2017a, 2019,2020c). This inquiry is an opportunity to examine its role in promoting productivity, as well as lessons andopportunities from the COVID-19 pandemic. While this volume is primarily focused on the formal education
system, this is only one channel that contributes to skill formation and labour productivity. For example,
on-the-job training and experience also play a key role in developing human capital.
Improved education can contribute to productivity across the whole economy. But it is even more importantfor future productivity growth in the services sector, where human capital plays a much greater role. In
agriculture and traditional manufacturing, physical capital accumulation and increasing mechanisation allows
far fewer workers to produce far more. This might not be replicated in many parts of the services sector. For
example, increased productivity in residential aged care is likely to reflect better care by staff. There may beless scope for reductions in staff-to-resident ratios facilitated by new technologies.
Education will also be critical for reaping the economy-wide benefits of automation and digital technologies— future growth is likely to involve a greater level of skill-biased technological change. These factors haveprompted a growing need for tertiary graduates in the labour force. At the same time, school student testscores have been stagnant or declining, and new modes of education delivery have emerged. Althoughthese challenges are not new, the COVID-19 pandemic has been an accelerant. Securing the right systemsettings now is imperative to ensure that Australia does not miss the opportunities of a world economy
changing at an increasingly rapid rate.

Rising skill levels have underpinned Australia’s productivity growth
The evidence that education plays an important role in productivity growth is compelling. From 1993 to 2021,
the share of Australian adults with less than a high school education fell from 47% to 16%, while the share ofadults holding tertiary qualifications rose from 22% to 50% (OECD 2023). As this happened, the measured

1 See for example, gemaker, sub. 13, Jenny Gordon, sub. 17, Australian Education Union Federal Office, sub. 21, The

Smith Family, sub. 26, National Tertiary Education Union, sub. 36, Grattan Institute, sub. 37, Australian Chamber ofCommerce and Industry, sub. 47, Australian HR Institute, sub. 54, Primary Focus, sub. 56, KPMG, sub. 60, Universities
Australia, sub. 70, Alphacrucis University College, sub. 133, DASSH, sub. 141, Desmond Griffin, sub. 143, Regional
Universities Network, sub. 154, Australian Chamber of Commerce and Industry, sub. 175, Innovative Research
Universities, sub. 177, Ai Group, sub. 179, La Trobe University, sub. 182, Monash University, sub. 184, Group of 8, sub.
187, Science & Technology Australia, sub. 188, Universities Australia, sub.195, Tasmanian Government, sub. 196.
2

The value of human capitalquality of labour in the economy improved. Figure 1.1 shows the results of a standard ‘growth accounting’
exercise. Relying on some assumptions, one can measure how more education (labour quality), moremachinery and equipment (capital deepening), and more innovation (multifactor productivity) contribute to thegrowth in labour productivity. Labour quality — reflecting the education and experience of the workforce — has
accounted for about 20% of labour productivity growth in recent decades. This suggests that labour quality has
accounted for a larger share of labour productivity growth as other drivers have started to slow or stall.
This result is only approximate, as it relies on a number of assumptions. In particular, it relies on correctly
measuring the growth in labour quality. Labour quality is measured in terms of the average years ofeducation in the workforce, with an adjustment for average years of work experience. If greater numbers ofeducated workers reduce the benefits of additional education, then growth accounting would overestimate
the contribution of labour quality. Likewise the contribution could be overstated if the quality of education had
fallen. At the same time, better education could also be contributing to other factors, by increasing capital
investment, innovation, or allowing workers to better use capital; in that sense growth accounting could
underestimate the contribution of education (Cole, Paulson and Shastry 2014; Kong, Zhang andZhang 2022; Parker and van Praag 2006; Riddell and Song 2017). That said, multifactor productivity has
stagnated in recent decades despite the growth in educational attainment.
Figure 1.1 – Labour productivity has grown partly due to a more skilled workforcea
Factors accounting for labour productivity growth since 1994-95
170
160

Index (1994-95=100)

Labour quality

150
140
Capital deepening

130
120

110
Multifactor productivity
100
1994-95

2003-04

2012-132021-22a. Capital deepening reflects the increase in GDP per hour worked that can be explained by higher levels of capital.
Labour quality reflects the increase in GDP per hour worked that can be explained by higher levels of workforce
education and experience and is not the causal effect of education. Multifactor productivity is the change in GDP perhour worked that cannot be explained by these factors.
Source: ABS (Estimates of Industry Multifactor Productivity, 2021-22 financial year, Cat. no. 5260.0.55.002, table 2).

It has been noted there may be limits in the contribution of increasing levels of education to economic growth(Tom Karmel, sub. 197, p. 1), as rising education levels reduce the productivity uplift from an even greaternumber of skilled workers. However, there is no evidence that we have reached — or are even close to —the point where the cost of education for marginal workers outweighs the benefit received by them and bysociety (chapter 3). And most new jobs are forecast to require some level of tertiary education (section 1.2).

3

5-year Productivity Inquiry: From learning to growth Inquiry report

Although aggregate productivity statistics point to an important role for education, the magnitude of thecausal relationship is difficult to determine from the macroeconomic picture alone. The microeconomic
evidence outlined below provides a stronger indication.

Education improves worker productivity
More educated workers are more likely to be employed and earn higher wages, even after accounting forsome individual characteristics (figure 1.2).2
These effects remain strong despite two well-known confounders in the relationship between educationand earnings.
• People with more innate ability take part in more education, meaning some of the effects of education willreflect pre-existing ability rather than the effect of education itself. Nonetheless, Australian evidence stillfinds substantial earnings and labour force participation benefits to the completion of secondary school,
vocational education, and higher education after accounting for unobserved innate ability (Leigh 2008).3• The ‘signalling’ theory holds that education could provide little benefit to worker productivity, butnevertheless increase earnings by showing employers the worker has the ability to complete their
qualification. However, empirical evidence suggests that strong earnings benefits remain beyond theimpact of signalling (box 1.1).
Figure 1.2 ⁠– More educated workers are more likely to be in the labour force and earnmore over their lifetime
Average expected hourly wage

100
80
60

%
40
20

60
50
40
30
20
10
0
20

25

30

35

0
Degree Diploma/ Year 12
or higher Certificate
Employed

Not in the labour force

Year 11

Unemployed

40 45
Age

50

55

60

Year 11 or below

Year 12

Diploma/certificate

Degree or higher

Source: Productivity Commission estimates using wave 20 of the Household, Income and Labour Dynamics in Australia
survey, following Forbes, Barker and Turner (2010).

2 Variables accounted for include gender, age, geographic location, and employment variables.
3 The method used to account for this ‘ability bias’ credibly found that this inflates the apparent earnings benefits ofeducation by about 10% for secondary school students. However, it simply assumed that this bias is of the same
magnitude in vocational and higher education.
4

The value of human capitalBox 1.1 – Human capital and signalling theory – does a qualification make you
smarter or just signal that you might be smarter?
Economists have long debated why workers with greater levels of education earn a higher income.
Human capital theory holds that education — from schooling to university — increases a worker’s
productive capacity, which is rewarded by higher pay (Becker 1962). Signalling theory, however, holds
that education has little or no intrinsic benefit, and that educated workers are only paid more because
their higher innate ability makes it easier for them to complete qualifications, which they use to signal toemployers that they are innately smart or hard-working (Spence 1973). Ultimately, there is evidence tosupport both human capital and signalling benefits of education, and recent work centres on measuring
the extent of each effect (Huntington-Klein 2021).
But there is evidence against the most extreme form of signalling theory in that the earnings benefits
from greater levels of education for workers with the same initial ability persist over time — if education is
only valuable as a signal of ability, why would the effects persist even after employers can directly
observe the ability of employees? There are two possible explanations. First, that employers are unable
to ascertain the ability of their employees. And second, that starting out in a high-paid position locks
workers onto a permanently higher-paying career trajectory.
Recent research has challenged these explanations and therefore signalling theory, comparing
graduates who were just above or just below the threshold for university awards or had their marks
arbitrarily rounded higher or lower — with the same ability, but different signals of their ability. In two
studies, earnings for those with this false signal were higher initially, but differences disappeared after
two years (Khoo and Ost 2018; Toft Hansen, Hvidman and Sievertsen 2021). The employers saw
through the misleading signals, instead paying workers based on their ability. And starting out in ahigher-paid position did not seem to have lasting effects.
Given this, persistent earnings benefits over time among workers with the same initial ability imply
genuine human capital development from education. In fact, earnings benefits seem to grow over time
(Bhuller, Mogstad and Salvanes 2017). These findings are significant, implying that tertiary education
increases total workforce productivity by developing human capital, rather than merely redistributing thesame jobs from less to more educated individuals through signalling effects.

Education develops general labour force skills …
Education is critical to general skills development. There is evidence of benefits from both secondary andtertiary education to general cognitive performance (Kamhöfer, Schmitz and Westphal 2019; Ritchie andTucker-Drob 2018). Literacy and numeracy skills, although largely developed at school, also increase at afaster rate among university students compared with other people of the same age (Hampf 2020).4
It also improves other non-cognitive skills, with evidence that this occurs into the post-schooling years. For
example, an Australian study found that non-cognitive skills — such as sociability and tendency to
co-operate — improve at a faster rate among those who go to university compared with those who do not

4 While this study estimated notable increases in both literacy and numeracy skills, the timing of tests means that someof these skills may have been gained while in the workforce, rather than at university.
55-year Productivity Inquiry: From learning to growth Inquiry report(Kassenboehmer, Leung and Schurer 2018). And people who finish high school are often better equipped tomake informed decisions, a skill that leads to a range of other benefits (OECD 2010).
Educated workers undertake more formal and informal on-the-job training (OECD 2012) which has similar
benefits for productivity (Dostie 2010).5 Overall, the OECD estimated that increasing the skills of workers inmedian-productivity firms up to the skills of workers in firms on the productivity frontier could close theproductivity gap between these firms by 19% (Criscuolo et al. 2021).
Beyond developing skills, education can also enable workers’ skills to be put to better use. There is evidence
that higher education can improve the matching of workers to jobs, as indicated by how long graduates staywith their first employer (Floyd, Tomar and Lee 2022), an additional channel through which education can
increase productivity.

… fosters greater levels of innovation …
An educated workforce has the potential to facilitate innovation. Clearly, advanced education in areas such as
science, digital technology or medicine is a key input to technological breakthroughs in many areas. Similarly,
increases in the supply of educated workers lead to greater levels of innovative activity from firms (Kong, Zhang
and Zhang 2022). Managers with greater levels of education invest more in research and development (Huang
et al. 2020). And education increases the success of entrepreneurs (Parker and van Praag 2006).
However, as emphasised in this inquiry’s companion volume ‘Innovation for the 98%’, Australia can also see
significant gains from adopting and putting into practice novel, or new-to-world, innovations from overseas,or from broader diffusion of Australian innovations. An educated workforce supports this diffusion, partly
because educated workers are more likely to adopt new technologies (Riddell and Song 2017). Given the
key role of innovation for productivity growth, this presents yet another mechanism through which education
can drive productivity.

… and delivers broader benefits to society
Education improves productivity partly due to the positive spillovers it creates ⁠ — benefits to society beyond
the educated person. For example, workers may pass their skills or insights from their learning on to theirpeers, co-workers, or children and so increase their productivity (Bentsen, Munch and Schaur 2019;
Suhonen and Karhunen 2019) A greater overall level of education may also create new jobs for lower skilledworkers (Schultheiss, Pfister and Backes-Gellner 2018).
Further, education could improve health and reduce crime by enabling people to make better-informed life
choices (Hai and Heckman 2022; Hjalmarsson, Holmlund and Lindquist 2014; Jha and Polidano 2016;
Kamhöfer, Schmitz and Westphal 2019). The higher employment rates and earnings resulting fromeducation can also reduce government support payments and raise tax receipts, which could be used tofund productivity-enhancing reforms or lower the tax burden.
Other work suggests that the benefits from education could be even broader. Higher levels of education
appear to be associated with community engagement, advocacy and volunteering, trust and tolerance,

5 Although some research found that the benefits to the worker and the firm are roughly equal (Nilsson 2010), other worksuggests wage benefits to workers, although positive, are smaller than the increase in their productivity (Konings and
Vanormelingen 2015).
6

The value of human capital

healthy behaviours, environmental conservation activities, employment and business management, lower
financial stress, and reduced reliance on government support payments (DESE 2019).6
Public investment in education has been found to reduce inequality (Fournier and Johansson 2016) andgenerally ‘improves society by increasing equity and social cohesion’ (Australian Education Union, sub. 21,p. 3), potentially improving the prospects of the most disadvantaged students by fostering social mobility.
Intergenerational cycles of disadvantage can also be disrupted by education, with parental education
increasing a child’s attainment and reducing the chance that they repeat a grade (Havari and
Savegnago 2014; Oreopoulos, Page and Stevens 2006).
University peak bodies have quantified the benefits of education, consolidating many of the factors
outlined above, although there are significant limitations to the analysis that suggest it may overstate thenet benefits (box 1.2).7

Box 1.2 – Reports from university peak bodies are overconfident in their estimatedbenefits of higher education
Recent studies commissioned by university peak bodies suggest large returns on investments inuniversities – with each dollar invested in university teaching apparently returning $4 to society (Deloitte
Access Economics 2020, p. 22), and education by Group of Eight universities providing $5 billion in value
to society, not including a potential $11 billion in additional benefits to employers (London
Economics 2018, p. viii).
However, there is reason to believe that the true effects are more limited, and far more challenging toestimate, than these reports suggest.
Both London Economics and Deloitte Access Economics included in their analysis the multiplier effects
of university spending (that is, benefits to other businesses). Implicitly, this makes the incorrect
assumption that governments and consumers would not spend these funds elsewhere if universities did
not exist, or that if they did, there would be no multiplier. Indeed, guidance on cost-benefit analysis
typically recommends against the inclusion of multipliers (Infrastructure Australia 2021, p. 89; NSWTreasury 2017, p. 12). London Economics also simply counted overseas student non-tuition spending inAustralia as an economic contribution rather than estimating the net contribution (additional consumption
minus additional labour supply); the net contribution using this approach is likely to be far smaller(PC 2020b, pp. 151–153). Making these adjustments significantly reduces the estimated effect.
Deloitte Access Economics used OECD country data to estimate a production function representing eachcountry’s economy. The share of workers who have completed tertiary education was included as amultiplicative input. This approach will not perfectly capture the relationship between education and6

While education is linked to a greater probability of these outcomes, it is difficult to disentangle the contribution of
education, as those who opt in to additional education may be independently more likely to achieve them. However,international analyses that account for this have found beneficial effects in line with the Australian results for theseoutcomes (Hai and Heckman 2022; Kämpfen 2021; Österman 2021).
7 Note, these studies also attempt to estimate the estimated impact of university research output, however in the context
of this volume we focus on their findings regarding the impact of university education. These research impact estimatesalso have some limitations. For example, diminishing marginal returns to research are not accounted for, and themethodological approach risks attributing the benefits of overseas R&D to Australian universities.
75-year Productivity Inquiry: From learning to growth Inquiry reportBox 1.2 – Reports from university peak bodies are overconfident in their estimatedbenefits of higher education
output — at the extreme, it implies that Australia’s GDP would be zero if all workers with tertiary
qualifications did not have those qualifications.
Both papers estimated the impact on earnings of a university education. Students who attend university
on average have characteristics that make them more likely to succeed in the labour market, even
without a university education; so this must be accounted for. While both controlled for cognitive ability,
using a rough measure, they did not control for other characteristics associated with university
attendance, such as aspects of family background or individual personality; so the impact of university islikely overestimated, as educated workers would have earned more even without their education. London
Economics at least acknowledged the estimates they use ‘do not provide any evidence on the causal
effects of education attainment’, although they nevertheless used these estimates.
Any attempt to quantify benefits involves methodological challenges. But assumptions in modelling need
to be reasonable. And reporting of impacts should imply a degree of certainty that is proportional to thestrength of the evidence.
This is not to say that the benefits of education are not large, or that they do not justify further expansionof access to education. However, efforts to quantify these benefits (particularly when paid for by parties
with a vested interest) need to be interpreted with caution.

1.2 What skills are necessary for Australia’s future
workforce?
The education sector needs to adapt to emerging skills requirements of the Australian economy. The skills
demanded have been shifting, and there is also likely to be ongoing structural adjustment in the wake of the
COVID-19 pandemic. Over time, technological change and automation have replaced or enhanced aspectsof some jobs, and generated demand for others (PC 2017, p. 83). An increasing proportion of jobs require
non-routine skills, which typically demand workers with higher levels of education or training (figure 1.3). Past
experience suggests automation is likely to shift tasks and occupations to new areas rather than simply
eliminate them. As jobs and tasks change more rapidly, it will become increasingly important that education
provides adaptable general skills. In particular, this would mean benefits to the workforce go beyond higher
earnings to increased job security and lower risk of obsolescence.
In addition the services sector now predominates, accounting for 90% of workers, up from about 50% in
1900 — affecting the skills required in the economy (PC 2021, p. 6). Similarly, population ageing has meant
rising demand for health and care workers. Education can develop the skills needed to meet these structuralshifts, and reskill workers who become displaced (Ernst, Merola and Samaan 2019).

8

The value of human capital

Figure 1.3 ⁠– Non-routine skills are increasingly demanded, particularly cognitive
Job types in the labour force (share of total)a45
Non-routine cognitive

Share of employment (%)

40

35
Routine manual
30
25

Routine cognitive

20
15
Non-routine manual
10
5
0
1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

a. Based on a mapping from ABS labour force to Australian and New Zealand Standard Classification of Occupations jobclassifications. Non-routine, cognitive: Managers, Professionals; Non-routine, manual: Community and Personal Service
Workers; Routine, cognitive: Clerical and Administrative Workers, Sales Workers; Routine, manual: Technicians andTrades Workers, Machine Operators and Drivers, Labourers.
Source: ABS (Labour Force, Australia, Detailed, November 2022, Cat. no. 6291.0.55.001, table 7).

Foundational skills underpin productivity
The quality of the education received early in life affects wellbeing and has a long-term influence onAustralia’s economic growth and prosperity. Education prepares children for their future lives by providing
foundational skills required to participate in further education or training, enter the workforce, and participate
wholly in society as adults. It is at primary and secondary school that students acquire the foundations oflearning in literacy, numeracy and digital skills recognised as ‘essential skills for every student’ (Education
Council 2020, p. 13).
Conversely, poor literacy, numeracy, and digital skills limit workers’ ability to perform many tasks or engage
in further training. Put bluntly by one participant in this inquiry:[P]roductivity enhancing attainment at TAFE and University are bounded by the limits ofachievement at earlier levels of schooling. Poor readers make poor students at any stage ofeducation. (Primary Focus sub. 56, p. 4)
Many Australians are still limited by these skills. One in five adults have low basic skills, leaving them unable
to perform tasks that could include reading a petrol gauge or understanding the label on painkillers(OECD 2017). This is associated with lower likelihood of being in employment, education or training; andlower incomes. A better education system would reduce the share of lower-skilled people and promote theirwellbeing and the productivity of the workforce. And foundational skill deficits will become even moredamaging as the demand for routine manual skills continues to decline (figure 1.3).

95-year Productivity Inquiry: From learning to growth Inquiry report

Non-routine work requires more than technical skills
Interpersonal skills are also critical to many workplaces, with effective and respectful engagement withco-workers, managers, customers, or clients as their foundation. While interpersonal skills will often reflect
family characteristics and general social norms, education and training can also play a role. For example, theethos of customer-centric care in aged and disability care involves some teachable practices. Research has
found strong earnings and productivity benefits to non-technical skills, and that these skills can be developed
through education at many levels, ranging from preschool to on-the-job training (Heckman and Kautz 2012;
Prada, Rucci and Urzúa 2019).

Skill formation will be essential to the future workforce
Skill requirements will grow in future decades. Even now, there is a significant mismatch between thequalification levels demanded by employers and those possessed by job seekers (figure 1.4). And this could
worsen, with the former National Skills Commission (NSC) projecting that more than nine out of ten jobs
created in the next five years will require post-school education, and that three out of every five new jobs will
be high-skilled (NSC 2022b) (figure 1.5).
The NSC identified computing, cognitive abilities, communication, and care as key skills needed for future
job growth (NSC 2021, p. 113). Developments in ‘caring’ sectors in particular will drive future skill needs. In
2020-21, for every one retirement age person, there were 3.9 working age people, but by 2060-61, there will
only be 2.7. The number of working age people for every person over the age of 85 is expected to fall from33.2 to 12.5 over the same time period (Centre for Population Projections 2021). This will increase thedemand for aged care workers. And growing health spending, partly due to the ageing population, willcontinue requiring more healthcare workers. Occupations in these areas require varying levels of education(usually including post-school qualifications), and all benefit from the cognitive and non-cognitive skills
developed in secondary and tertiary education. The tertiary sector, in particular, must be prepared to provide
the skills necessary for the care workforce to expand in coming years.
Although we can make predictions that skills in some broad areas will experience greater demand in the
future, exact skill needs are hard to predict. Many occupations that will be created in coming decades may
be hard to even conceptualise, relying on technologies that are yet to be invented — necessitating lifelong
learning to update skills in response to changing technologies and occupational demands. Ongoing andcontinual learning will complement and transcend what occurs in traditional education institutions. In thiscontext, it is important that the education sector remains dynamic and adaptable and that businesses havethe internal capacities and incentives to train their employees.

10The value of human capital

Figure 1.4 – Many job vacancies need higher qualifications than job seekers possessa,bWorkforce Australia caseload and online job ads, by skill level
300,000
250,000

Workforce Australia caseload

Online job ads

200,000
150,000

100,000
50,0000Bachelor degree orhigher

Diploma or advanced
diploma

Certificate II, III or IV

Certificate I or schoolinga. Workforce Australia caseload does not include all unemployed people. It also includes some employed people with low
earnings. Workers with less than Year 10 education are not included. Caseload data as at 30 November 2022. b. Internet
Vacancy Index data on online job ads are only based on a selection of websites. Multiple positions in a single advertisement
will be treated as a single vacancy. Many jobs are not advertised online or at all, and this may be more likely to be the casefor positions with lower skill requirements. Results have been seasonally adjusted. Vacancy data for October 2022.
Source: Productivity Commission analysis based on unpublished DEWR data and Jobs and Skills Australia (2022).

Figure 1.5 – Almost all new jobs over the next 5 years will require tertiary educationa,bCertificate I or secondary education

Certificate II or III

Certificate IV or III

Advanced Diploma or Diploma

Bachelor degree or higher
0

100

200

300
400
500
Employment growth ('000)

600

700

a. From the National Skills Commission Employment Projections, five years to November 2026. ‘New jobs’ refers to
employment growth and does not include mobility between existing positions. b. Certificate IV or III includes Certificate
III level qualifications that include at least two years on-the-job training. Certificate II or III includes Certificate III level
qualifications that do not include at least two years on-the-job training.
Source: Adapted from NSC (2022).

11

5-year Productivity Inquiry: From learning to growth Inquiry report

1.3 The education sector context
Schooling in Australia consists of primary and secondary education, ranging from the Foundation Year toYear 12, with school attendance compulsory to Year 10. Of the 9600 schools, approximately 70% are run by
State and Territory governments, with remaining schools operating as part of the Catholic education systems(18%) or as independent schools (12%) (ABS 2022, table 35b). In 2021, there were about four million
students enrolled in primary, secondary and special education school across Australia (ABS 2022,
table 42b).
Although a large share of learning occurs on the job, the tertiary education sector plays a vital role inproviding both general and occupation-specific skills. The tertiary education sector can be divided into:• higher education, comprising universities and other higher education providers (just under 200
providers in total)• vocational education and training (VET), comprising TAFE colleges and institutes, adult and community
education providers, private providers, community organisations, schools, higher education institutions,commercial, industry body and enterprise training providers (over 4000 providers in total).8
The higher education sector delivers both generalist education and training for highly specialised professional
occupations. Conversely, VET is mostly focused on targeted vocational training, developing skills for aparticular job function or trade; but also plays an important role in developing foundational skills. Over recent
decades, massive open online courses (MOOCs) and microcredentials have entered the market — oftendelivered by industry as well as higher education institutions — providing alternative avenues for skill formation.

How the sector is performing
Academic achievement of Australian school students has stagnated over the past decade. Student
achievement is often gauged using results from the National Assessment Program — Literacy and
Numeracy (NAPLAN) or the Programme for International Student Assessment (PISA) tests.9 Average PISA
scores for both mathematics and reading have declined over recent surveys, while NAPLAN scores havebeen generally steady across all year levels. Recent Productivity Commission analysis suggests the fall in
PISA results has been more modest than is commonly reported (PC 2023, pp. 57–58).
Overall student achievement can also be assessed by looking at ‘performance bands’ (figure 1.6).
Performance bands represent increasingly challenging skill levels and correspond with increasingly higherscores on the NAPLAN scale. Prior to COVID-19 there was an increase in the proportion of high-performing
students in primary schools in reading. Other than this, the proportions of students in the bottom and top
performance have remained relatively constant across year levels.
The lack of improvement in academic results has been accompanied by a concurrent increase in the amountof money spent on schools (figure 1.7). Overall, gross school income per student has increased by nearly
20% in real terms since 2011, with little discernible improvement in test scores. A lack of improvement insuch student outcomes may reflect where this additional money has been spent: school income per student
from government sources for government schools increased by about 18% in real terms since 2011, while
the increase was 34% for Catholic schools and 47% for Independent schools.

8 Based on the national register of vocational education and training (training.gov.au) as at January 2023.
9 NAPLAN is a national assessment taken each year by year 3, 5, 7, and 9 students, whereas PISA is an international

standardised test for 15-year-old students — regardless of what year they are in at school — conducted each year by theOrganisation for Economic Co-operation and Development (OECD).
12

The value of human capital

Figure 1.6 – NAPLAN suggests that performance has not improved in recent yearsa,bPercentage of students in the top or bottom two bands, 2008–2022
Numeracy

60

Reading

Year 34020
060Year 5

40

%

20
0
60

Year 740
20
060Year 9

40
20

0
2011

2013

2015

2017

2019

2021

2011

2013

Proportion in the bottom two bands

2015

2017

2019

2021

Proportion in the top two bands

a. NAPLAN testing was not conducted in 2020. b. Students assessed as being in the bottom two bands are at or below
the national minimum standard. NAPLAN assessment scores for reading and numeracy can be grouped into ‘bands’
indicating proficiency in each domain. There are ten bands overall for each domain, with national minimum standards
steadily increasing as year levels increase. Students are assessed as being in one of the six bands relevant to their year
level, with band 2 the national minimum standard for Year 3, band 4 the minimum standard for Year 5, band 5 theminimum standard for Year 7 and band 6 the minimum standard for Year 9.
Source: ACARA National Report on Schooling in Australia data portal.

Australia’s tertiary attainment rate is high, with more than half (54%) of 25-34 year-olds holding a tertiary
qualification in 2021, well above the OECD average of 47% (OECD 2022a).10 However, a large share of
students commence qualifications without completing them, raising the question of whether attainment rates
could be improved, or the matching of students to different parts of the education system made more
effective (chapter 3; chapter 4). For tertiary education, the best data available on performance quality
comprises surveys on employment outcomes and student and employer satisfaction. These mostly point toreasonable and stable satisfaction, although there is room for improvement. In the years leading to the
10 Tertiary education is defined as Diploma and above under OECD classifications. For this volume more generally,

tertiary education refers to qualifications that are Certificate III and above.
13

5-year Productivity Inquiry: From learning to growth Inquiry report

COVID-19 pandemic, university student satisfaction hovered around 80%, but it has fallen since thepandemic (SRC 2022b), likely owing to the rapid move online. Employer satisfaction is in the mid-eighties
overall and over 90% in relation to technical and foundation skills — key aspects of university education.
Government-funded VET qualification completers also reported high rates of satisfaction, averaging 88%
over the past decade (NCVER 2022a).11 In recent years, employer satisfaction with VET qualification holders
has decreased, although it has increased slightly for university graduates (NCVER 2021; SRC 2022a).
Figure 1.7 – Spending on schools has increaseda,bGross income from different sources, by school sector
Government$/FTE student (2020 $)25 000Catholic

Independent

20 000

15 000
10 000
5 000
0
2011

2014

2017

2020

2011

2014

2017

2020

2011

2014

Australian Govt.

Fees and charges

State/territory govt.

Other private sources

2017

2020

a. Total gross income excludes capital grants. b. Amounts are deflated using General Government Final Consumption
chain prices (table 2A.26, SCRGSP 2022).
Source: ACARA National Report on Schooling in Australia data portal.

Most tertiary graduates find employment soon after completing their qualification. However, current cohorts
do not appear to be faring as well in the short term as those a decade previously (figure 1.8). This may partly
reflect temporary macroeconomic effects, rather than an indicator of poorer university performance. Indeed,in the medium term, there is little downward trend in labour market outcomes. More generally, it is difficult todisentangle the impacts of changing characteristics of the student intake and their course choices on labour
market outcomes from the effectiveness of universities as training institutions.
Still, even if the short-term declines cannot be attributed to the tertiary sector, they should prompt institutions
to redouble their attention on improving student outcomes — to ensure they are able to support a student
body with more diverse needs, and to prepare graduates for an increasingly challenging labour market.

11 This does not capture students who do not complete their qualification, or the majority of students that do not receive

government funding.
14

The value of human capital

The sector is also not set up to meet rising demand for tertiary education. Those born during the ‘Costello
baby boom’ of 2005–2008 will start to leave school shortly, dramatically increasing the population of potential
students (figure 1.9). The higher education sector in particular will be unable to meet this additional demand
under current funding arrangements (chapter 3).
Figure 1.8 – Changing trends in employment outcomes for VET and university graduatesa,bRecent VET graduates employed or in further study,

University graduates employed full-time after

either full-time or part-time

graduation

100

Share of qualification completers (%)

Share of qualification completers (%)

100
95
90
85
80

Employed or in further
study after training

75

70
Employed
65
60
2012

2014

2016

2018

2020

2022

95

Employed after
3 years

90
85
80

Employed after
4-6 months

75
70
65
60
2012

2014

2016

2018

2020

2022

a. The NCVER National Student Outcomes survey is administered to VET graduates about 6 to 8 months after course
completion. The QILT Graduate Outcomes Survey is administered to university graduates about 4 to 6 months after
course completion while the Graduate Outcomes Survey – Longitudinal is administered after about 3 years. NCVER andQILT surveys are not directly comparable, including that the QILT Graduate Outcomes Survey does not report the shareof graduates in employment or further study. b. NCVER National Student Outcome survey data include completed
government-funded qualifications only.
Sources: NCVER (2021b); SRC (2022c).

155-year Productivity Inquiry: From learning to growth Inquiry report

Figure 1.9 – The population of school leavers will expand considerably in coming yearsa
People reaching tertiary age over time
380
370

Population ('000s)

360
350
340
330
320

310
300
Future population of post-school students

290
280
2015

2020

2025

2030

a. Population is projected from 2017 onwards. Projections do not account for the effect of COVID-19 on migration andmay therefore be an underestimate, although most of the forecast growth comes from the domestic population.
Sources: ABS (Population Projections, 2017 (base) — 2066, Cat. no. 3222.0, table B9); ABS (National, state andterritory population, June 2022, Cat no. 3101.0, table 59).

What this volume covers
Given the breadth of the education system, this volume of the inquiry does not review the sector
comprehensively. There have been many reviews into various aspects of both school and tertiary education
over recent years.
• School performance and student achievement were examined in the second Gonski review (Gonski etal. 2018), and there have been reviews of the Australian Curriculum (ACARA 2022c) and initial school
teacher education (Paul et al. 2021). The Productivity Commission’s Review of the National Schools
Reform Agreement examined how well national policy initiatives by the Australian, State and Territory
governments have achieved the agreement’s objectives and outcomes (PC 2023).
• Recent reviews into the tertiary education sector have assessed the governance of the sector, including
the role of the regulator ASQA (Braithwaite 2018); the higher education provider category standards(Coaldrake 2019); regional education (Halsey 2018; Napthine 2019); funding (PC 2019); and, theperformance of the VET sector (Joyce 2019a; PC 2020c). The recently-commenced University Accord
process will also consider many of these issues and is due to report in December 2023.
The early childhood family environment and quality early childhood education and care services can also be
important for the development and future prospects of children, and lay the groundwork for effective
education. However, this volume focuses on the school and tertiary education system.
Both the quantity of education delivered and its quality are important to Australia’s ongoing productivity andprosperity. While there is evidence of a need for greater levels of skill formation, over time it may become
more challenging to achieve productivity improvements solely through increases in the quantity of education(that is, the number of people attaining higher levels of education). Gains from additional years of secondary
schooling have mostly been exhausted, and although additional tertiary students still benefit greatly fromtheir education (Deming 2022, pp. 77–78), these returns could diminish over time. More people flowing
16

The value of human capitalthrough the education system makes the quality of education — what people gain from the years invested —increasingly important. And increases to the quantity of education will only benefit additional students, while
quality improvements can increase outcomes for all students. Getting better outcomes for a given number ofyears of education by raising its quality and better matching what is taught to emerging skill needs will
become critical.
In this light, the remainder of this volume considers improvements that support:• schools to provide the foundational skills required to improve economic performance, including throughbetter use of technology in the classroom; diffusion of effective teaching practices; and experimentation
with innovative school models (chapter 2)• post-school education to develop the skills needed in the Australian economy, achieved through bettertargeting government investment and loan arrangements (chapter 3)• better student outcomes in post-school education, by encouraging quality and relevant teaching andfacilitating completion where it is in the best interest of students (chapter 4).
Appendix A provides additional detail on the performance of higher education providers. Appendix B details
stylised whole-of-economy modelling undertaken by the Productivity Commission for this inquiry, whichfound that potential productivity improvements arising from improved education quality and better meetingskill needs could lead to increased real GDP and individual wellbeing.

17Building productivity in schools

2.

Building productivity in schools

Key points
Academic achievement among children is stagnating, and the productivity of schools has been
declining in recent years. Improvements in the way schools work and the quality of teaching could
improve both the productivity of the education sector now and, through improvements in the
productivity of our future workforce, contribute to long-term, economy-wide productivity gains.
Flexible and innovative approaches to allocating school resources are key to an effective and adaptive
school system.
Digital technologies hold significant promise when combined with appropriate pedagogical techniques— to augment teacher-led instruction, provide formative assessment of student progress and further
replace manual school administrative processes.
• Digital technologies can also expand access to quality teaching and help address the challenges associatedwith teaching out of field.
• But not all technology is necessarily effective. There is a role for government agencies to provide guidance
to teachers and schools about digital learning options with proven efficacy.
Credible evidence about educational best practice is key to supporting better outcomes for more
students, including in their post-school lives. But having the evidence alone will not achieve this.
Effective observation and feedback, and curriculum implementation support are importantmechanisms for diffusing best practice into more classrooms.
Beyond what happens in the classroom, how schools operate affects student outcomes. In contrast toa fundamental progression evident in nearly every other sector of the economy, the basic model ofschool operation in Australia has changed little over the past century. An openness to experimenting
with school models and evaluating what works has the potential to deliver long-term benefits.

19

5-year Productivity Inquiry: From learning to growth Inquiry report

2.1 Lifting productivity in a stretched system
The role of education in developing the future workforce to foster productivity growth is broadly accepted. By
contrast, applying a productivity lens to the operation of schools can seem foreign and can draw opposition.
This chapter addresses both these aspects and recognises that there are multiple channels through which
education can drive productivity. But it is also important to note that better school outcomes matter beyond
productivity. A better school system will also have broader benefits to students’ wellbeing. Education increases
people’s capabilities, makes society healthier, safer, better informed, more civically engaged, and fosters social
mobility (chapter 1). The benefits of a more productive school system would support all of these aims.
Improving productivity in schools is about getting better quality outcomes for students from the inputs (teachers,
other staff, and physical capital) or using these resources more efficiently for the same quality outcomes.
Aggregate future productivity improvements are more likely to come from improving the quality of education
received than from additional years spent accruing education (Primary Focus, sub. 56, pp. 11, 23).12
Improving teacher effectiveness is central to improving student outcomes. A teacher who is one standard
deviation above the average teacher (in terms of their ability to increase student achievement), instructing aclassroom of 15 students, could increase the average lifetime earnings of the classroom by about $530 000
in a given year; or about $35 000 per student (PC 2023, pp. 333–334). While an effective teacher can
improve student lifetime earnings, a less effective teacher can have the opposite effect. Further, the effects
on student lifetime earnings are cumulative: students that have an effective teacher one year followed by anequally less effective teacher the next year will experience no net gains (Hanushek 2011, p. 473).

School productivity has trended downwards
Although it is difficult to reliably estimate (box 2.1), school productivity has been trending downwards inrecent years. Given the size of the sector13 and the role of schools in providing the building blocks of future
human capital, any improvement in the way schools work is likely to result in future economy-wide
productivity gains. There may be some immediate gains from improved productivity in the sector. But
perhaps more important are the longer-term gains from improved productivity of labour across the economy
more generally.
As system designers, funders and suppliers of formal school education, governments play a key role. To
achieve a better functioning schools system geared to long‑run productivity improvement, governments can:• embed digital technologies into the classroom in a way that supports improved outcomes for students(section 2.2)
• strengthen and embed the mechanisms to diffuse evidence-based best practices in the classroom(section 2.2)
• encourage and support trials of different educational operating models (section 2.3).

12 Nevertheless, it is likely that completing Year 12 will have benefits to the individual, their families and communities.
13 In 2021, there were over 9500 schools across Australia, employing over 300 000 teachers and 140 000 non-teaching

staff (ABS 2022f).
20Building productivity in schools

Box 2.1 – Resources needed to educate a child have increased significantly overtime, while school productivity has declined
Productivity is a measure of how well an organisation uses available inputs to achieve its desired
outputs. Schools primarily seek to use their ‘inputs’ — capital (buildings and equipment) and labour(teachers and other staff) — to produce ‘outputs’ in the form of educational attainment, which can bebroadly defined. It is hard to measure school productivity because it is difficult to measure output and toaccount for changes in its quality (PC 2021, pp. 25–26). The failure to properly account for improvements
in quality and difficult-to-measure outcomes mean that simple measures of productivity can substantially
underestimate productivity improvements (OECD 2001, p. 37).
The ABS experimental estimates of school labour productivity and multifactor productivity (MFP) (seefigure below) do not account for changes in the quality of inputs or outputs, and so should not be seen as
an authoritative measure of productivity. They simply provide an indication of how aggregate changes in
the number of students educated relate to changes in the volume of inputs used:• labour productivity compares the changes in the volume of services produced (full-time equivalentenrolments, weighted by costs) with the change in the volume of labour used (hours worked)• multifactor productivity compares the volume of outputs to a measure of combined inputs ; including
labour, capital, and intermediate inputs (energy, materials, and purchased services).
As school education is a labour-intensive service, changes in multifactor productivity are similar to changes
in labour productivity. Over the ten years to 2018-19, MFP fell on average 1.2% each year, while labour
productivity fell on average 1.1% each year. This reflects that annual growth in outputs (about 1.3%) was
less than the measured growth in inputs (about 2.7% each year for combined inputs). Approximately 65%of the decline in labour productivity and 60% of the change in MFP is attributable to the decline instudent-staff ratios. If student-staff ratios had been held constant over the ten years to 2018-19, labour
productivity would have declined by only about 0.3% on average per year (instead of 1.1%).
Some studies make adjustments for education quality. The Queensland Productivity Commission
adjusted estimated productivity for the proportion of students that met the minimum standards. Theseestimates also used cost shares to weight schools by type (primary or secondary) or sector(Independent, Catholic, or government) and used total deflated revenue as the measure of inputs(Cornell-Farrow 2019, pp. 8, 26).
By this metric, school productivity in Australia appears to have decreased modestly, with an annual rateof decline (across Australia) of about 0.14% between 2009 and 2016 compared with 0.72% growth of
MFP in the market sector (16 industries) over the same time period (ABS 2022b; Cornell-Farrow 2019,p. 22).14 Nevertheless, achievement of minimum standards is still a narrow indication of education.15

14 Market sector multifactor productivity (MFP) differs from the school productivity measure used here in that the former

used labour and capital inputs weighted by their cost shares while the latter uses total revenue deflated by theGovernment Final Consumption Expenditure implicit deflator. Also, the market sector figures use financial years ending
in those years while the Queensland Productivity Commission figures use calendar years.
15 It does not cover important aspects of school education, including student engagement and student wellbeing, thatshould be considered in the context of productivity estimates.
21

5-year Productivity Inquiry: From learning to growth Inquiry reportBox 2.1 – Resources needed to educate a child have increased significantly overtime, while school productivity has declined
Overall, the evidence suggests that the resources required to educate a child have increased
significantly over time, and that when quality adjusted, there is likely to have been a modest decline inproductivity in the sector.
Inputs and outputs in the school sector
Index value 2008-09 = 100
Outputs

InputsLabourCapital140140Intermediate

Combined

130

130

120

120

110

110

100

100

FTE enrolments

Financial year ending

Financial year ending

Productivity indicesStudent-to-staff ratio

100

100

95

95

90

90

85
80

Multifactor productivity
Labour productivity

85
80

Financial year ending

Student to Teacher
Student to Non-teacher

Financial year ending

Source: ABS (Experimental school education multifactor productivity estimates, September 2021, Cat. no. 8104.0).

A stretched system is less adaptive
Schools and teachers are bound by an array of policies and requirements intended to improve student
outcomes. This architecture has been developed over time to enable all students to access high quality
education. The COVID-19 pandemic demonstrated schools and teachers can adapt when they must. They
responded quickly, transitioning teaching online across all year levels and adjusting teaching practices tomanage risks of COVID upon students’ return to schools.
There is some adaptive capacity in the system, but simultaneously a lack of readiness or capacity to shift
resources more fundamentally in search of better outcomes. There is evidence and research on what works

22Building productivity in schools

both in the classroom and at the school level, but current approaches and resource allocations — which
concentrate most tasks at the teacher level — leave little time for staff and practices to adapt, experiment,
and pick up innovative and evidence-based approaches.

The teacher’s role is increasingly complex
Teachers play a critical part in the education system and are the single largest ‘in-school’ factor contributing
to student outcomes (figure 2.2). The teacher’s role is broad ranging — encompassing understanding
students and how they learn, as well as knowing subject content and how best to teach and assess it.
Beyond this, the Australian Professional Standards for Teachers require teachers to maintain a safe learning
environment, provide feedback and report on student learning, interpret student data, communicate andengage with parents, communities, and colleagues, and undertake ongoing professional learning(AITSL 2018). Communities value and expect that, as part of a well-rounded education, teachers support thephysical and mental health of students, cultivate critical and creative thinking, personalise learning, report on
progress, and use data to support learning.
A teacher’s role and how they teach students is arguably becoming more complex and demanding. This
reflects an increased need for, and recognition of, personalised and inclusive education, as well as increased
administrative burdens that stem, in part, from the accountability necessitated by greater school autonomy.
A more customised learning experience (as opposed to teaching to target the average student) means thatteachers need to understand a student’s prior knowledge, and tailor instruction, assessment, and feedback
to their needs. The skills, capability, and time needed for teachers to personalise learning is significant,particularly given there is often a large spread of ability within classes. For example, the Productivity
Commission found an average 4-year learning gap in numeracy in individual schools (PC 2023, pp. 5, 82).
Schools are also more diverse than they used to be, as classes consist of a broader range of abilities andbackgrounds. Inclusive education, while valuable to student outcomes of both those who do and do notexperience disability (CYDA 2022, p. 1), requires extra training, and takes time and skill to do well, adding to
the complexity and intensity of the work of a teacher (Australian Education Union, sub. 21, p. 9).16
The OECD Teaching and Learning International Survey data shows that Australian lower secondaryclassrooms have a higher proportion of students with special needs and migrant backgrounds, and more
non-native speakers and refugees than the OECD average (Thomson and Hillman 2019, p. 48). The
Australian Curriculum, Assessment and Reporting Authority (ACARA 2022d, p. 7) highlighted the limited
resources to address diverse teaching needs:… teachers are working with diverse classroom environments in terms of their students’ ability
levels, socio-economic backgrounds and demographic composition. In addition, many systems
face budget constraints which limit the amount and quality of support available to teachers to facethese new challenges and demands.
Teachers increasingly need to gather data as evidence of student learning or to demonstrate their own
capabilities for accreditation against the Australian Professional Standards for Teachers. Many teachers findlocating the right information and documenting accreditation time-consuming and challenging, and multiple
systems and agencies have resulted in duplication (NSW Department of Education 2021b, p. 10).
Some have argued that school autonomy has increased teacher workload due to reduced centralised
support and increased reporting requirements. School autonomy offers devolution of responsibilities from16 Inclusive education recognises the right of every student to be included in a general education setting — adapting theenvironment and teaching approaches to ensure genuine and valued full participation of all students.
23

5-year Productivity Inquiry: From learning to growth Inquiry reportlarge government departments to schools — aiming to empower them to operate more efficiently, effectively,
and produce better outcomes. Indeed, the World Bank concludes that most countries whose students
perform well give their schools substantial authority to shape local education provision and determine theallocation and management of resources.
However, an emerging consequence has been the increased workload outcomes of heightened accountability
and teacher ‘responsibility’ combined with greater work intensification. Indeed, higher administrative andaccountability requirements supporting increased school autonomy are among the ‘primary sources ofcompliance and administrative requirements’ (AITSL 2020, p. 4). ACARA (2022d, p. 7) noted that:… schools are arguably becoming more bureaucratic, teachers report having weak work
autonomy in their daily activities and being overloaded with non-teaching activities, especiallyadministrative tasks.

Teachers are impeded from focusing on the highest value tasks
Some teachers are working long hours, with estimates ranging from 44 to 57 hours per week for full-timeteachers in term time. Yet these long hours in term time are often spent on low value — albeit necessary —tasks, preventing teachers from meeting the complex expectations of teaching. Teachers and principals
report that teaching and learning is hindered by their high workload during term time (Hunter, Sonnemann
and Joiner 2022, p. 16; McGarth-Champ et al. 2018, p. 2).
Further, a 2021 representative survey of teachers and school leaders found that over 90% of teachers
surveyed reported they did not have enough time to prepare effectively for classroom teaching (Hunter,
Sonnemann and Joiner 2022, p. 13). This view was largely backed by school leaders, with 77% agreeingthat teachers in their school either ‘always’ or ‘frequently’ do not have enough time to prepare for effective
teaching (Hunter, Sonnemann and Joiner 2022, p. 13).17 Monash Q Project18 and Australian Learning
Lecture also highlighted that meaningfully integrating research about best practice into lesson planning iscomplex skilled work that teachers struggle to dedicate sufficient time to (sub. 160, p. 8; sub. 124, p. 6).
Face-to-face time represents just one element of a teacher’s week (figure 2.1). Full-time classroom teachers
spend about 21 to 24 hours in face-to-face teaching in a typical teaching week (AITSL 2021, p. 66). One
teacher observed how their day is filled with a breadth of tasks:
My days are filled with behaviour management, the bombardment of emails, writing programs,
marking work, giving feedback, reporting to parents, setting student goals, writing individual programs,
attending meetings and professional development to remain registered. And, dare I forget, theuploading of data into the system before the deadline. If only I could just teach! (Stroud 2022)

17 Preparing for effective teaching was defined to include planning for classroom instruction; preparing, marking, andanalysing student assessments; preparing student feedback and adapting teaching; preparing to support struggling
students; building professional knowledge and skills; and collaborating effectively with colleagues and experts.
18 The Monash Q Project is a five-year study in partnership between Monash University and the Paul Ramsay Foundation withthe aim to better understand and improve the use of research in Australian schools (Monash Q Project, sub. 160, p. 2).
24

Building productivity in schools

Figure 2.1 –Time teaching face-to-face is only one part of a teacher’s weeka
Average proportion of weekly hours spent on teaching tasks by full-time teachers, 2018
Face-to-face teaching

Planning or preparing
lessons

Marking/assessing
student work

Generaladministrative
work

Other
teamwork

Student
supervision &counselling

Liaising
Extracurricular withactivities parents/
carersa. Survey respondents are from New South Wales, South Australia and the Northern Territory. Figure includes
responses for full-time workers only.
Source: Australian Teacher Workforce Data Teacher Survey 2018.

High-value non-teaching tasks enable teachers to track and analyse students’ progress, inform parents of
their child’s achievement, and maintain and improve their professional practice (NSW Department of
Education 2021b, p. 2). But some teacher time is spent on tasks that are overly burdensome or do not
actively support quality teaching — almost 10% of teacher time is spent on ‘general administrative work’(such as manually processing forms or checking attendance) (figure 2.1). In a COVID-affected environment,teachers have also been managing health regulations relating to rapid antigen tests for students. One
teacher reported that planning time was reduced to hand out COVID-19 tests, reflecting the opportunity costof adding tasks to a teacher’s workload:… this year I have spent hours of planning time handing out RATs to students, a task that anyone
could do. Why am I doing this? Our deadlines are not extended when planning time is taken away
because we’re expected to use our weekend to catch up on work. (Stroud 2022).
The New South Wales Government acknowledged, following a review of teachers’ workload, that too muchtime is spent on low-value administrative work.
We have heard from teachers and principals that too much time is spent on low-value administrative
work that is overly burdensome, such as manually processing forms. Teacher time needs to be
redirected to high-value tasks, such as adapting and differentiating lesson content and resources forthe individual needs of their students. (NSW Department of Education 2021b, p. 2)
Whatever the cause, long working hours, high work intensity, and a lack of recovery time have been shown
to impair not only teachers’ own wellbeing but also their motivation and ability to provide high-quality
instruction (Boeskens and Nusche 2021, p. 14; Australian Education Union, sub. 21, p. 2). This compromises
student outcomes. Supporting a better allocation of teacher time to make the most from their skills andqualification would help support quality teaching and student learning.

25

5-year Productivity Inquiry: From learning to growth Inquiry report

Finding 8.1
Making time to adapt and deliver best practice will require better allocation of school resources
Teachers’ roles have become more complex, with increasing demand for provision of a high quality,
evidence based, personalised, and inclusive education that reflects and accommodates diversity in theneeds of students.
Current use of resources across the system leaves teachers stretched. Enabling teachers to focus on quality
teaching vital to student outcomes would require more efficient and innovative use of school resources —including teachers, other school staff, and technological solutions — to support better student outcomes.
Educational needs and demands on the role of teachers will continue to evolve with changes in theeconomy and future workforce needs, and so there needs to be scope to test out innovative approaches
to teaching and learning.

2.2 Working smarter to improve student outcomes
The Productivity Commission’s education policy reform directions are primarily focused on influencing the
adoption of best practices in education (in both classrooms and schools) and enabling innovation in how schools
operate. There is a poor connection between education policymaking and implementation in the classroom, andsome participants have advocated that a better understanding of classroom practice is essential to designingeffective education policy (PC 2023, p. 198).
Improved productivity in schools can be achieved through various means, such as:• Better resource allocation: improving the use of all school staff so that teachers can focus their time andeffort on high-value tasks, with lower value tasks allocated to other school staff• Higher quality teaching: shifting the overall quality of teaching will benefit all students, and have agreater impact on those who are struggling and at risk of falling behind• Ongoing diffusion of best practice: using various mechanisms with flow-on impacts to classroom
practice across all schools, including by leveraging effective digital technologies.
Some of the recommendations proposed in the following sections could be initiated in the short to medium
term (for example, improving use of digital technology, and implementing better observation and feedback
practices in schools). But they also have long-term implications for the productivity of both the school system(that is, getting more out of the resources used) and the broader economy, as students who benefit fromsuch reforms will ultimately become more active and productive members of society. Looking further ahead,experimenting with the school model and trialling innovative approaches (section 2.3) could ultimately have atransformative effect for some schools and students.

Improving use of staff is key to better outcomes
School outcomes are influenced by a range of factors inside and outside of school (figure 2.2). While young
people’s personal attributes and home environment strongly influence how they perform at school, the act ofteaching and the attributes of the teacher make a big difference, explaining about 30% of the variation in
student achievement.

26

Building productivity in schools

Figure 2.2 – Variation in student achievement is explained by a range of factors insideand outside of schoola
Teachers –including
instructional
quality, teachingpractice and style

Peer effects – the effects of other students

5-10%

30%

5-10%

School – including principal effects,
finance, school size, class sizeand physical infrastructure

5-10%Student
achievement

50%

Home – including levels of
expectation and encouragement

Students – including priorcognitive ability, disposition tolearn and affective attributes

a. Student- and home-level factors are affected by the child’s and family’s wellbeing, which are influenced by the family’s context
and environment and broader policy settings. The relative effect of these factors is likely to differ by cohort and environment.
Source: Productivity Commission (2023), adapted from Hattie (2003).

Staff salaries in government schools account for approximately 64% of total in-school expenditure(ACARA 2022a, p. 104).19 As education is labour-intensive, making the best use of the staff in schools is
critical to achieving the objectives of the education system with the resources available.
However, the way we conceive of teaching can constrain its quality:
Teaching is also constrained by old ways of thinking. Despite the growing recognition of demands
on teachers’ workloads, their work is still often measured by their physical presence in theclassroom. Everything else that enables successful lesson delivery such as lesson planning,learning design, marking, and assessment, is often unacknowledged and undervalued. (Australian
Learning Lecture, sub. 124 p. 6)
The future vision of the role of the teacher and their most valued tasks is shaped, and possibly limited, by thesystem that is currently operating. Given the current complexity of teaching, choices need to be made about
how limited staff time can be used most effectively. Considerations include: the relative effort afforded toeach task; the best way to do each task; and, how teachers can be supported by other resources (such asother staff, infrastructure, and technology).

Better use of non-teaching staff
The mix of different types of staff in schools, their responsibilities, and how they are managed can deeply
impact the use of teachers (Boeskens and Nusche 2021, p. 67).20 For example, teaching assistants, byproviding increased attention on certain students, can have a positive effect on cohesion in the classroom,
19 Teacher salaries make up about half of all in-school expenses and about 80% of salary costs. In-school expenses include

the user cost of capital as well as those that relate to teaching, learning, school administration and library functions.
20 Schools employ a range of staff in addition to teachers and school leaders, including teaching assistants, administrative
staff, maintenance staff as well as specialist support staff (such as guidance counsellors and school librarians).
27

5-year Productivity Inquiry: From learning to growth Inquiry report

reduce disruption, and allow more time for teachers to teach (Evidence for Learning 2019a, p. 7).
Additionally, administrative staff can free up teachers to focus on core teaching functions by doing tasks
such as processing excursion permission slips (Evidence for Learning 2019a, p. 7).
Options such as delegating low-value tasks and changing task allocation between types of staff are not
revolutionary but nevertheless could, if applied on a widespread basis, help teachers better use their timeand focus on activities that have the greatest positive impact on student learning.
Over the past 30 years, all categories of non-teaching staff have grown considerably relative to students(from a very low base), while the growth in teaching staff has been somewhat lower (figure 2.3). This
increase in school staff has occurred at the same time as the intensification of teacher workload.
Figure 2.3 – A greater diversity of types of staff in schoolsa
Change in staff to student ratio between 1993 and 2021

120

Admin & teacher aides (126%)

100
80
60
Other (59%)
40

Number of staff per 100 students

Specialist staff (154%)
140

Percentage change (%)

7.5

8.0

160

6.7
6.0

4.0

2.8
2.0

1.3
0.2

0.4

0.2

0.4

0.0

20

Teachers (13%)

1993 2021 1993 2021 1993 2021 1993 2021
Specialist

0
1993

1998

2003

2008

2013

2018

Other

Admin &
teacheraides

Teachers

a. Administrative staff and teacher aides include classroom assistants, library assistants, teacher aides,
bursars/school administrators, IT support staff, and accountants. Specialist Support Staff include student support
services, such as career advisers, student counsellors or liaison officers; educational development, such as staff andcurriculum development; school psychologists and social workers. Other includes janitors, building or grounds
maintenance staff, technical services and general maintenance staff, school nurses, and canteen workers.
Source: ABS (Schools, various years, Cat. no. 4221.0, table 51a).

Rather than more staff overall, what may be required is the better use of existing non-teaching staff,
particularly teaching assistants.
The research on the impact of teaching assistants in Australia is not extensive. Considerable research in the
United Kingdom over the past decade or so provides some insight on where Australia may look to improve
how teaching assistants are used in classrooms. Indeed, the deployment of teaching assistants has not
typically improved student outcomes in the United Kingdom (Evidence for Learning 2019a, p. 14). Evidence
for Learning recommended focusing on moving away from teaching assistants substituting as teachers forstudents with highest needs, toward being a general class resource helping teachers better accommodate all
students (Evidence for Learning 2019a, p. 14).
The Productivity Commission’s review of the National School Reform Agreement (NSRA) found governments
should seek to better understand teachers and school leaders’ perspectives on what teaching assistants’28Building productivity in schoolsrole should be, and how to best prepare teaching assistants for their role (PC 2023, p. 235). AITSL’s
submission to this inquiry has echoed the need to clarify and understand the role, use, and impact of otherschool staff, and develop an evidence base on best deployment and support mechanisms (sub. 146, p. 6).

Improving student learning with digital technology
Technology has fundamentally changed the way students learn, teachers practice their profession, andschools operate. It has evolved from one computer for the school, to one per class, to personal devices
operating in networked schools that wirelessly save outputs to the cloud and enable sharing with teachersand other students.
Historically, public discussion on the use and spread of technology in schools has focused on hardware,perhaps motivated by a sense that access to computers would help students learn about technology. In fact,
future gains in educational outcomes will likely come through software, as applications get integrated intoclassroom practice and technology is used to augment the teaching of ‘traditional’ core subjects like maths,
reading, or history (OECD 2021c, pp. 15–17). Three broad categories of education technology (EdTech) thatoffer the most promise to improving student outcomes (Loble and Hawcroft 2022, pp. 21–22) are:• student-oriented applications: intelligent tutoring systems that create personalised learning paths forstudents that adapt as they progress and encourage them to reflect on their learning• teacher-oriented applications: ‘smart’ curriculum tools using AI to bring evidence-based resources
directly to teachers for lesson planning and assessment• system-oriented applications: AI-based modern data techniques (such as machine learning) can
empower schools and systems to more accurately identify students at risk of disengagement andintervene in a timely and targeted way.

Opportunities to improve student learning
Digital technologies offer an array of new possibilities to support student learning, including providing
opportunities for learning unconstrained by space or time and providing access to learning tasks that were
not previously possible (box 2.2). Technology can support students of different abilities and/or learning paces
through personalised learning programs, where students work through material in an online application(supported by a teacher) (Major, Francis and Tsapali 2021, pp. 1938–1939).
Online apps present information to students using varied methods (such as passages of text or video) tocater for the different ways students prefer to learn. In this way, technology can increase student
engagement by making learning more appealing, such as using game-based learning or virtual reality.
Students can be engaged with learning in a playful and dynamic way using principles of competition, points,
incentives, and rewards. For example, Mathletics provides students with animated maths activities andchallenges that allow students to earn rewards for correct answers, consistency of work over a number ofweeks, and participation in live competitions (3P Learning 2014).

29

5-year Productivity Inquiry: From learning to growth Inquiry reportBox 2.2 – A framework for integrating technology into student learning
The Substitution, Augmentation, Modification, Redefinition framework outlines how digital technology canbe integrated into student learning with reference to traditional teaching methods or materials(Terada 2020). Although the distinction between categories can be unclear at times, the use of digitaltechnology in teaching can be classed as fitting into one of four levels:• substitution: Technology acts as a direct substitute replacing traditional material with no functionalchange. For example, lessons and worksheets are converted into PDFs and posted online forstudents to access rather than a paper version distributed in class• augmentation: Technology acts as a direct substitute with some functional improvement to enhancelearning. For example, worksheets that are converted to PDFs may also include hyperlinks toadditional material or have a media clip embedded for students to watch• modification: Technology allows the learning task to be significantly redesigned. For example, allowing
students to ask their teacher questions through a chat function as an alternative to orally• redefinition: Technology allows for the creation of new tasks, previously inconceivable. For example, aschool 400 kilometres south of Darwin used cameras to locate spiky pokipain (echidna), which had notbeen seen in the region for years (Fitzgerald 2022).

Digital technology can also be more adaptive to new learning content. In the past, textbooks would be set
and used for years, and it could take some time for new information to be reflected in these books. Online
programs, including digital texts, can be updated with new information in a much shorter cycle than physicallearning materials. Further, digital texts can provide access to information and specialised material beyond
what is in a textbook using the internet (OECD 2022b, p. 78).
In some ways, the future role of technology in school education could be similar to the role it has played inadvancing the quality of health care provision over the past century (Ambinder 2005, pp. 54–56; HATIInternational 2017).21 Digital technologies can more easily ‘scale up’ practices across schools and potentiallypresent a lower cost option to augment teacher capabilities. Augmenting inputs can support teachers inlesson delivery, for example — and in some cases replace low-value tasks such as by automating
administrative processes.

Supporting teachers with digital technology
With expanded access to resources and knowledge, students may become less reliant on the teacher duringclass time, potentially freeing up the teacher to focus on students with greater learning needs during lessons,and reduce the amount of planning time required for each class.
Digital technologies can aid teachers in a range of activities, including planning and presenting lessons,sharing resources, individualising lesson plans, and assessing students. They can also support other tasks
that are separate from learning activities, such as administration, and aid communication with parents.

21 The increase in precision and accessibility of medical imaging technology (such as MRI scans), for example, allows

doctors to find diseases in their early stages — leading to better outcomes for patients (PBMC Health 2018). When
combined with other technologies, such as artificial intelligence, further quality improvements can be achieved (such as
better diagnoses) along with easing the workloads of radiologists (Walach 2022).
30

Building productivity in schools

Formative assessments that use digital technologies may help teachers move away from aresource-intensive, paper-based practice to one that is more streamlined and provides support to the teacher
in analysing individual learning progress and common trends in the classroom (table 2.1).22
Table 2.1 – Technology can support teachers in their formative assessment practice

Teaching & learning

Assessment questions

Administer assessment

Traditional approach

Technology-enabled approach

The teacher develops their own resources

The teacher uses existing digital content or(or utilises centrally provided resources).

interactive applications.

The teacher creates paper-based

The teacher can select from pre-existingassessments, using a photocopier outsideassessments or create their own, distributingof class time.

assessments digitally and quickly.

Students can only sit paper-based

Students sit the assessment digitally,assessments if in school. Students whoavailable through an app or browser. Thisare not present miss the assessment.

flexibility enables students to takeassessments ‘on-demand’, as opposed tohaving to be present in the classroom.
Other issues, such as managing potential
cheating, need to be managed, but
technology can help with this too.

Mark assessments

The teacher marks each student’s

The teacher retains the ability to markresponses on paper with pen.

papers individually but could make use of
automatic marking solutions, such as
self-marking quizzes.

Student Feedback

Data Capture & Storage

Students physically receive their returned

The teacher can provide individual

assessment, graded by the teacher. In

feedback and make use of voice notes

some instances, the teacher will provide

and/or video to provide richer, deeper

additional written feedback.

feedback to students.

The teacher stores data in a spreadsheet,

The teacher can use assessment

manually inputting individual student scores. platforms to automate data capture, which
can be shared more widely with other staff
members or with parents.
Gap Analysis & Spotting

The teacher analyses the scores manually,

The teacher can intelligently analyse

Trendslooking for knowledge gaps or trends instudent performance, either at an individual

performance.

level or across cohorts (pre-determinedsuch as year groups or custom groups).

Source: Edtech Impact (2022).

While formative assessment can be done manually by teachers, software can potentially automate repetitive,
time-intensive tasks such as marking student assessments and provide more granular insights into student
learning. Students are likely to experience greater benefit where ‘individualised feedback is provided
instantaneously and more frequently’ (Lane et al. 2019, p. 13). The potential benefit of this area isrecognised with formative assessment included in the eight policy initiatives in the NSRA (DESE 2021d).

22 Formative assessment encompasses both formal and informal assessment procedures that are used to modify futureteaching and learning activities.
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5-year Productivity Inquiry: From learning to growth Inquiry report

Digital technologies can also assist in monitoring student engagement in learning activities. Teachers areable to monitor whether materials have been accessed and which questions have been attempted andanswered correctly, providing feedback about active participation with assigned tasks.

Digital technology can reduce teacher administrative load
Replacing administrative tasks via automation is likely to be welcomed by teachers and school staff to theextent that it removes or simplifies tasks that are often tedious or time consuming, and do not necessarily
directly contribute to student learning. Examples include:• a phone accessible interactive portal that lets parents give permission for their child to attend an excursion(with email or text message reminders for parents so they do not miss the due date, which would
otherwise require teachers to follow up with a phone call)• an application that can efficiently book a series of parent-teacher interviews, at mutually convenient times
with minimal need for teachers to manage the process.
Implementation of digital technologies for administrative purposes needs to consider staff (including
non-teachers) workflow, staff training and skill requirements, interoperability of systems and successfultransition from paper-based systems. A shift from total to partial reliance on paper-based administrative tasks
can require staff to manage more administrative processes, actually increasing workflow.
In a UK survey, the majority of headteachers (74%) and teachers (65%) indicated that technology alreadyhad, or would in the future, contribute to reduced workload (CooperGibson Research 2021, p. 14).23 Where
there is concern about increased workflow, schools (or governments) may wish to consider the scope for acap on the total administrative tasks (or hours) teachers are doing, to ensure that technology replaces orsimplifies tasks rather than creating new ones.

But there are challenges for schools ahead
While better use of staff and technology represent some immediate ways to lift school productivity,
consideration must be given to the associated implementation challenge in an already stretched system, andon ensuring that technology works for the benefit of students and teachers.

School staff need to be digitally competentTechnology is not a silver bullet, and with it comes challenges for teachers, principals, and school
administrators. Many people working at schools did not learn digital skills while at school themselves —teachers will need support to integrate digital technology effectively into their teaching practices, and schools
will need support to identify the best products to deliver the desired benefits to their students. Being able toteach students digital skills requires:… developing the technical skills of educators first rather than assuming (incorrectly) that they
have the skills already, then the specific pedagogical approaches for digital skills, and finallyintegrating digital skills deeply and authentically in their own disciplines. (Grok Academy,sub. 185, p. 4)
The same challenges apply in using digital technology in the classroom environment. The COVID-19
pandemic opened the school system to change, but the challenge ahead is to retain the benefits of theseapproaches, rather than reverting to previous operating models.

23 The Commission could not find similar data for Australia.

32Building productivity in schools

While there remains scope for schools to extend the use of technology and improve the use of existing
technologies, past studies have shown that its use does not always lead to better student outcomes(OECD 2022b, p. 27). The Australian Education Research Organisation (AERO) noted:
One area in which considerable investments are being made with an inadequate evidence-base iseducation technology … Rigorous evaluation of the features which make such technology
effective, and evidence-based quality assurance of education content, would be wise prior to theirimplementation at scale. (AERO 2022, p. 2)
Teachers’ training and ability to integrate technology into teaching processes is also key (OECD 2022b,
p. 79). For example, the effective use of formative assessments that involve digital technologies requires
both assessment knowledge and data literacy, meaning that deriving beneficial learning outcomes from thetechnology needs an increased focus on the use of digital technologies in initial teacher education andteacher professional development.

A digital divide in learning persists
Inclusion remains an important consideration in formulating approaches to the use of digital technology inschools. The COVID-19 pandemic focused attention on the challenges education systems face in addressing
the ‘digital divide’: structural differences in the ability of students to access and effectively use digitaltechnologies. There are substantial differences in access to technology (for students and teachers) between
advantaged and disadvantaged communities (figure 2.4).
Meaningful digital inclusion depends on more than just access to devices and functioning broadband.24
Students and teachers need to have the knowledge, skills, and motivation to make the most of thetechnology offered. The ‘digital use divide’ exists between students who use digital technologies in active
and creative ways to support their learning, and students who use them for passive content consumption(Vlies 2020), and there are also gaps in access to these opportunities between socioeconomic
groups (Thomson 2020). These challenges make the implementation of EdTech complex, and therefore it
needs to be properly designed, used, and regulated to have a demonstrably positive impact on learning
outcomes for disadvantaged students (Loble and Hawcroft 2022, p. 8).

24 The Australian Digital Inclusion Index (ADII) covers three core aspects of inclusion: access, affordability, and digitalability which includes enthusiasm, confidence, and a sense of control when using the internet, as well as experience,skills, and knowledge in internet use.
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5-year Productivity Inquiry: From learning to growth Inquiry report

Figure 2.4 – The digital divide in advantaged and disadvantaged communities

ABC
Advantaged
communities

Disadvantaged
communities

Share of students with internet
access at home

91%

68%

Share of students with a computer athome to use for school work

99%

84%

Share of students with 3 or morecomputers in the home

91%

41%

Share of teachers with insufficient digitaltechnology for instruction

13%

32%

Sources: The Smith Family (2017), Thomson (2020), Thomson and Hillman (2019).

Issues arise with technology interoperability, privacy and security
The system and software requirements of schools depend on the size of the school, the social and economic
demographic of the students, the availability of internet access, the age of students and the technicalproficiency of educators within the school. Many schools, therefore, complement their centralised student
information systems with commercial off-the-shelf products (PwC 2020).25 This requires school staff andpotentially teachers or principals to consider a range of factors including software integration(interoperability), privacy and security of data, and the efficacy of the product. However, teachers andprincipals may not always have the training, time or information to make these choices well.
A number of State and Territory governments provide support to schools purchasing software.26 For
example, the Victorian Department of Education provides guidance on privacy impact assessment. This
process helps schools identify privacy and security risks, evaluate compliance with the Victorian Privacy andData Protection Act 2014 and Health Records Act 2001, and document what actions are required to mitigate
any identified risk (Victorian Department of Education 2020). The Australian Government’s eSafety
Commissioner provides online safety assessment tools and checklists to screen new technologies (eSafety
Commissioner 2022). However, even with such supports, risks remain. Analysis of over 150 educationalapps and websites found that close to 90% of those used could put children’s privacy at risk. These products

25 A schools’ student information system is the central source of information. It holds information about a student — their name,contact details, medical information, and academic information. Some jurisdictions have mandated centrally delivered systems,
while others allow the schools to choose (PwC 2020). Off-the-shelf packages can be used for a range of functions: channels ofcommunication with parents; scheduling parent-teacher interviews; managing parent payments for tuition or excursions;canteen services and uniform shops; recording visitors to school premises; and, monitoring student attendance and results.
26 The New South Wales Government has a centralised process for all information technology purchases (NSW
Department of Education 2022).
34

Building productivity in schools

requested access to students’ contacts and locations, and monitored their keystrokes. Some of theseproducts had undergone a privacy impact assessment (Duffy and Stewart 2022).

Support needed to implement digital technologies
There is limited information about how schools identify the need for digital technologies, understand theevidence about how these technologies are best used, and assess the relative costs and benefits of theirdeployment. Given the cost of some purchases, it is essential that school staff have the skills and capabilities
to choose technologies that are fit for purpose, provide value for money, have the necessary safeguards,
and are also beneficial for student learning, support teachers to teach or improve the operation of schools. Ifschool staff lack this capability, they will need access to resources to help them.
While agreeing with the potential for digital technology to enhance education, AITSL noted:
Whatever technology is used, it is important that it supports effective teaching and learning.
Teachers must have the capacity to shape how technology is used, and be provided with the timeand professional learning they need to implement it. Evaluation should focus on the impact of any
technology on student learning, and on how knowledge of impactful teaching has driven the useof technology (not the other way around). (sub. 146, p. 6)
To make these decisions, schools need to have access to information about the products available and beable to assess this information to make an informed decision. Evidence from other markets that sell complex
products, such as financial products, suggests consumers can resort to decision-making processes that areless than ideal when the information available is complex and opaque, or pricing structures are difficult tocompare (PC 2018, pp. 364–365, 373).
On that basis, there appears to be a role for government to provide a greater level of support — or one thatis more coordinated — for school staff to ensure the most beneficial digital procurement decisions are
pursued. AERO, or similar state- or territory-based organisations within each jurisdiction, should be
responsible for researching and vetting off-the-shelf digital learning programs or formative assessment toolsthat meet desired criteria, such as effectiveness, usability (for students and teachers), privacy and risk
considerations, and their complementarity to the national curriculum.
This would go some way to ensuring schools are not left on their own to navigate such decisions, and also
assist in the diffusion of best practice programs and tools. However, such responsibility should not extend to
mandating particular products, as some schools and jurisdictions may be well progressed on this front
already. It is important that schools and jurisdictions retain autonomy to make their own digital procurement
decisions, and having a body like AERO play a role in researching and vetting effective digital technologies
would be of greatest benefit to schools that are under-resourced to perform this role themselves.
To support digital technology integration into the classroom, an ongoing commitment to teacher development
is essential, especially considering the changing environment in which teachers are operating. The Grok
Academy (sub. 185, p. 5) emphasises that digital skills matter to all jobs, and advanced digital skills take time
to develop — priority should therefore be given to increasing digital skills development among educators
instead of assuming that they have these already. In regard to spreading best teaching practice AITSL(sub. 146, p. 5) recommended funding a ‘national online tool that allows teachers to find, manage, recordand evaluate professional learning’. Such a tool could also help teachers develop and learn the best ways toleverage and apply digital technology in their classrooms. Similarly, teachers may need assistance tounderstand and integrate the results of technology-enabled student progress analysis into their teaching.
Enhanced professional learning modules for teachers, that better aid them in understanding how to use datacollected digitally and apply this to their teaching practices could be developed. The New South Wales

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5-year Productivity Inquiry: From learning to growth Inquiry report

Government has already identified this challenge as part of its Schools Digital Strategy (NSW Department of
Education 2019, p. 20) with an actionable roadmap to address various challenges and opportunities that
education technology brings, including teachers having the professional development and access toresources to apply digital technologies where appropriate to improve student outcomes.

Recommendation 8.1
Leverage digital technology in schools
State and Territory Governments should work with schools to extend, improve and embed the use of
education technology in order to realise future benefits for students.
Initiatives should aim to:• enable teaching practices to evolve with the changing classroom environment by prioritising thedevelopment and implementation of digital tools to support teaching and learning, while balancing
flexibility for individual jurisdictions’ needs – this could include developing an online assessment tooland giving the Australian Education Research Organisation (AERO) responsibility for researching andvetting effective digital technologies to be implemented in schools• replace manual school administrative processes with technology-based and automated solutions where
this has not been done already – this could include evaluating technology-based solutions foradministrative processes currently in place and developing mechanisms to diffuse these to other schools• support continuous commitment to ongoing professional development modules that support teachers inusing data analytics to drive student improvement.

Making best practice teaching common practice
Drivers of effective teaching are varied and include factors that are affected by government policy (such asteacher salaries, the school environment, workload, classroom pedagogy, the national curriculum, and school
management) as well as professional development in both initial and ongoing training. One way to support
effective teaching is by building and supporting mechanisms that ensure evidence-based practice is used to drive
better outcomes. But how best to convert knowledge about educational best practice into common practice is oneof the main gaps in the process of diffusion (AERO 2021; OECD 2022c, p. 11; PC 2016, p. 29).
Some participants have called for government to have a greater understanding of classroom practice andpedagogical techniques (AERO 2022, p. 5; Grattan Institute 2022, p. 14). Having a greater understanding ofclassroom practice would help policy makers, school leaders, and teachers make informed decisions about
the policies, programs and classroom practices that would lift student outcomes.27
However, having an evidence base on its own will not ensure improvements in educational outcomes —effective practices must be employed by teachers in classrooms. Currently, there appears to be a substantial
gap between high-level policy discourse, education research and classroom practice. Walsh et al. (2022, p. 7)
found that teachers did not often use evidence-based research in practice. Instead, they indicated a stronger

27 The creation of AERO in 2021, which seeks to provide an evidence base relevant to Australian schools, should, in time

support informed decision making. The development of a strong evidence base is discussed more extensively in theCommission’s Review of the NSRA (PC 2023, p. 189).
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Building productivity in schools

preference for professional information such as student data (77%) and professional observations (70%),
compared with quantitative research (57%), qualitative research (48%) and randomised controlled trials (18%).
Not having a strong mechanism to convert education research into practice in the classroom lowers student
outcomes, relative to what they could be, and has flow-on implications for productivity:
The price of this disconnect between education policy, research and practice has been high: Overthe last few decades, education in most OECD countries has lost productivity, with teacher
salaries having risen but outcomes not improved. (OECD 2022c, p. 3)

Education research needs to be salient and readily usable by practitioners
Making sure that evidence-based practices are successfully applied in the classroom is a deliberate andongoing process.28 AITSL submitted that translating evidence into the classroom is not as simple ‘as
describing ‘best practice’ and expecting teachers to adopt it’ (sub. 146, p. 5). ‘Knowledge mobilisation’(converting knowledge about best practice into common teaching practice) has moved away from a linear
transmission, whereby evidence is developed (producers) and made available to the teachers and schoolleaders (users). Instead, it has moved toward a systems approach, which leverages relationships andengagement between all parties, and sees feedback loops and co-creation as central to knowledge creationand implementation (OECD 2022c, pp. 12, 20, 35–36).
At the school level, successful application of research relies on the ability of teachers, principals, and otherschool leaders to plan, implement, and evaluate change (Evidence for Learning 2019b, pp. 6–8). AITSL
highlighted that the critical ingredients to success include: the skills of school leaders managing change; and,the skills of teachers in selecting and applying strategies that suit both their students and the content they
are teaching (sub. 146, p. 5).
However, there can be barriers including a lack of time to access and engage with research. Research
results can also be inaccessible and not readily translated to classroom activities. Added to this may bechallenges posed by competing objectives, differing timelines, priorities, and prior views of researchers,
policy makers, teachers, and principals. Facilitating greater diffusion of evidence-based research will
therefore require coordination and leadership across multiple levels, skills and capabilities of key parties,
effective communication channels, and well-placed accountability structures (OECD 2022c, p. 36).
Efforts to promote evidence-based practice also need to be complemented by better information on what
happens in classrooms. This will help policymakers: understand gaps between evidence and practice; monitor
whether, and to what extent, particular evidence-based pedagogies and materials are being taken up; assess
whether initiatives to promote best practice are working; and, understand barriers to the adoption of effective
approaches (AERO 2022, p. 10; Sonnemann and Goss 2018, p. 16; Steiner, Magee and Jensen 2018, p. 15).29
Teachers also need guidance to consistently integrate the most effective approaches into daily practice.
Governments can play a role in facilitating better implementation of best practice by supporting better research
production, which involves more co-creation and greater visibility of classroom activity, and improving initial andongoing teacher training. Helping teachers access and implement evidenced practice also means
acknowledging the demand on their limited time and the resources needed to fully engage with the research.

28 The OECD (2022c, pp. 18–19) examines the models of knowledge transfer, the interplay of each organisation andmechanisms for successful adoption of evidence-based practices in the classroom.
29 There are numerous ways to improve visibility of classroom practice, including teacher and student surveys and direct
observation of classroom practice. All options carry costs and benefits (PC 2023, p. 200).
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5-year Productivity Inquiry: From learning to growth Inquiry report

Figure 2.5 – Translating evidence and diffusing best practiceDiffusionof bestpractice

Accessible and translatablehigh-quality evidence

Co-creation of relevant and highquality evidence

Resources to learn andimplement new approaches

Time and support to research andimplement new evidence-based
approaches

Networks for co-creation anddiffusion of evidence

Cultivating relationships which effectively
communicate best practice and create
feedback loops to improve future evidence

Observation and feedback is central to improving teacher practice
Cultivating effective teaching can look different for teachers at different points in their careers. At early career
stages, especially in the first three to five years of work, teachers gain a lot of their knowledge from induction
and mentoring. Ongoing professional development can help teachers at all stages access new
evidence-based classroom practices or new ways to approach teaching using new technologies.
The process of sharing teacher expertise can take many forms, but a central element is observation andfeedback. High performing school systems ‘cultivate an open door culture’ that ensures teachers have thetime to observe others to develop their knowledge and expertise and to provide feedback (Jensen etal. 2016, p. 39). Teaching should be promoted as a collaborative endeavour, with performance improved
through an ongoing process of constructive feedback (OECD 2018, pp. 115–116). Mentoring networks are
particularly important for teachers and staff in schools experiencing disadvantage who often have more
limited resources but more complex classroom environments (PC 2012, p. 278).
‘Highly Accomplished and Lead Teachers’ (HALTs), ‘Master Teachers’, and ‘Instructional Specialists’ areformal professional distinctions intended to recognise high-performing teachers. Employed byhigh-performing school systems overseas, such as in Singapore and Shanghai, Master Teachers areintended to be the pedagogical leaders in their subjects, working across a network of schools in their region
to identify teacher needs, coordinate training, and connect schools with research (AERO 2022, p. 11). Unlike
Master Teachers, who have no classroom load, Instructional Specialists split their time between classroom
teaching and instructional leadership, working in their own schools to support and guide other teachers inspecific subjects (Goss and Sonnemann 2020, p. 11).30
Some Australian States and Territories also have their own specialist teaching roles. For example, ingovernment schools in Victoria, Learning Specialists refer to highly skilled teachers that work with otherteachers to improve their practice. In New South Wales, the ‘Best in Class’ Teaching Unit is made up of‘handpicked’ teachers, chosen for being leaders and teaching experts in their respective fields. It is claimed
that these teachers comprise the state’s best teachers who share their classrooms skills directly with thoseteachers and students who need it most (NSW Department of Education 2020).

30 The Australian Professional Standards for Teachers recognise four professional levels and career stages: graduateteachers; proficient teachers; highly accomplished teachers; and lead teachers. Highly Accomplished and Lead Teachers(HALTs) are identified as ‘expert teachers and reflective practitioners who lead and support colleagues toward better
outcomes for learners’.
38Building productivity in schools

But the uptake of such formalised teacher networks has been limited in Australia. Since the introduction of
HALT certifications in 2012, only 1025 teachers have become certified; approximately 0.3% of the workforce(AITSL 2022, p. 14).
Reflecting the overall barriers to diffusion more generally, there are often limited instructional opportunities
due to limited resources and constrained teacher time (Goss and Sonnemann 2020, p. 20; Willis et al. 2022,
p. 35). A 2019 survey conducted by the Grattan Institute of 700 instructional leaders, teachers, and principals
found that Australia’s best teachers are often confined to their own classrooms, or stretched with ‘add-on’
instructional leadership responsibilities without adequate time, guidance or support to improve teaching intheir school. They are rarely given access to an expert mentor, and were usually provided with no initialtraining in being an instructional leader (Goss and Sonnemann 2020, p. 10).
While emphasis is often placed on more formalised programs such as HALTs, teachers sharing expertisewith others has also been identified as an effective form of learning and professional development (Grattan
Institute 2022, p. 9; Hattie 2003, pp. 1–2; Ingvarson and Rowe 2008, p. 8). Less formal networks — where
teachers work together in small groups to analyse and improve their practice — have been found to havesignificant positive effects on teaching quality and student academic achievement (TTRC, sub. 122, p. 3).
Indeed, teachers are more likely to trust research shared by colleagues than from any other source (Walshet al. 2022, p. 13). As informal networks do not require intensive application or certification processes, they
can provide an accessible avenue for time-poor teachers to improve their practice (PC 2023, p. 187). Ochre
Education observed that more support is needed to facilitate greater sharing of expertise and reach the
300 000 plus teachers in Australia (Ochre Education 2022, p. 4).
These various models are not mutually exclusive, and there is an opportunity more broadly to better support
observation and feedback mechanisms within schools. In the recent review of the NSRA, the Productivity
Commission recommended that State and Territory Governments include mechanisms for ensuring expert
teachers can support colleagues to achieve better student outcomes through the dissemination ofevidence-based practices (PC 2023, p. 188). Such initiatives would lift the quality of teaching in schools,
improve student learning and over the long term, lead to a more productive economy.

Centralised curriculum support is a key mechanism to diffuse best practice
The process of spreading best practice can also be facilitated by dissemination of high quality
curriculum-linked teaching materials. To implement the high-level achievement standards described in theAustralian Curriculum, schools and teachers are typically left to their own devices to map out what to teachand how (box 2.3). Ochre Education observed that the Australian Curriculum is:… a very broad and general framework to guide teaching of the subjects in the curriculum,
including the standards at each grade level. This means that the work of delivering or enacting thecurriculum on a daily basis is a significant task. Many teachers struggle to find the time, expertise,or resources to create excellent lessons each day. (Ochre Education 2022, p. 5)39

5-year Productivity Inquiry: From learning to growth Inquiry reportBox 2.3 Achievement standards, curriculum, lesson plans
Australian curriculum – national standards
The Australian Curriculum sets consistent national standards to improve learning outcomes for all young
Australians. It sets out, through content descriptions and achievement standards, what students should
be taught and achieve as they progress through school (ACARA 2022b).
School curriculum planning
Schools develop a syllabus that outlines the means to achieve the goals and standards expressed in theAustralian curriculum (or respective jurisdiction curriculum) across year levels and subject areas.
Schools also develop guidance to help teachers understand and apply what is in the national standards.
For example, learning progressions, developmental continuums, scope and sequence documents, andunit goals and plans.
Teachers use instructional material to help students achieve the learning goals set out in the standards,
such as textbooks, assignments, assessment tasks and scoring rubrics, computer programs, and lessonplans (Toon and Jensen 2017, p. 6). Lesson plans, one example of instructional materials, are ateacher’s detailed description of a lesson prepared before they start teaching. It covers what students willlearn, how it will be taught and how teachers assess learning (NSW Department of Education 2021a).
Material potentially included in a curriculum bankAustraliancurriculum

School-level plans andsubject sequences(or state/territory
equivalents)••

High -level
framework for what
students shouldknowContent descriptors
and achievement
standards••

Cohesive plans for how a school
will implement its curriculum,
including what students will know
and how they will be assessed
Detailed plans for single subjects
and units within subjects,
including key knowledge andskills and the sequence in which
they are taught

Classroom tools••

Lesson plans for teachers,
including objectives, tasks, key
content and instructional
strategies
Specific tools such as
assessments, worksheets andpresentations

Source: Figure adapted from Ochre Education (2022).

Individual teachers report spending hours preparing classroom lesson plans. While a central activity forteachers, most (86%) say that they do not have enough time for high-quality lesson planning — a viewshared by both novice and experienced teachers (Hunter, Sonnemann and Joiner 2022, pp. 13–14).
While some degree of lesson planning is an important component of teacher’s work to enable tailoring toindividual student needs, there are core aspects of planning for which it is inefficient to have every teacher
undertaking the planning individually. Such an approach introduces variability in the quality of lesson plansfrom classroom to classroom or school to school, which can flow through to diversity in student outcomes.
40Building productivity in schools

The Grattan Institute found that ‘many students experience a curriculum that comprises a poorly connected
series of activities, that can be highly repetitive or leave critical gaps’ (Hunter, Haywood and Parkinson 2022,
p. 7). Many teachers use materials from private platforms that are difficult to quality-assure. For example,
64% reported using YouTube (Hunter, Haywood and Parkinson 2022, p. 31).
Even when self-produced lesson plans and classroom tools are individually of a high quality, ‘havingteachers create their own lessons over time will rarely result in a fully sequenced, coherent learning
experience for their students’ (Steiner, Magee and Jensen 2018, p. 14). Ochre Education observed that
there were ‘significant gaps in much-needed detailed clarity, guidance, and support for teachers in planningand implementing the curriculum’ and this drove a lack of consistency and integrity in implementing thecurriculum (Ochre Education 2022, p. 5).
High-quality curriculum guidance and instructional material could support the spread of evidence-basedteaching practices in the classroom and reduce variability in the quality of lesson planning, and hence,outcomes for students. Providing teachers with classroom resources would also likely free up much of thetime they spend planning lessons. Hunter, Haywood and Parkinson (2022, p. 34) found that the typicalteacher surveyed (whose school provides them with a comprehensive bank of lesson plans for all subjects)
spends three hours a week less on sourcing and creating classroom materials than the typical teacher
whose school does not. This is in line with the experience of the UK’s Oak National Academy, whose bank oflesson plans improved the workload of just under half of users in the 2021-22 academic year, with a mediansaving of three hours per week (ImpactEd 2022, p. 4).
Saving this time would benefit students not just through quality teaching that is based on best practiceresources, but also through enabling teachers to spend more time customising their teaching to their classes(Hunter, Haywood and Parkinson 2022, p. 32). The saving could be greater for those teachers who areteaching out of field, and need to spend more time to understand new content and prepare lesson plans(Mayer et al. 2015, p. 127). Further, the development of curriculum support could also be coordinated with
better leveraging of technology to improve student outcomes.
Still, more than 40% of teachers reported their school does not have access to common, detailed lessonplans, unit plans, and assessments and a similar share said that their school has not established a detailed
whole-school curriculum across subjects and year levels (Hunter, Sonnemann and Joiner 2022, p. 25). Just
under half of all teachers are teaching in schools with no ‘school-based bank of instructional resources’(Ochre Education 2022, p. 6).
Not surprisingly, high quality material can also positively affect student learning (Hunter, Haywood andParkinson 2022, pp. 66–75; Steiner, Magee and Jensen 2018, p. 11). Improving teaching through better
curriculum materials can have a positive effect on student academic achievement, especially when partneredwith professional development programs for teachers. In a meta-analysis of international studies, Lynch et al.
(2019) found that high-quality STEM instructional improvement programs (either curriculum sequences orprofessional development, or both) had an average effect of improving student test scores by 0.21 standard
deviations. The most effective programs combined curriculum materials with professional development,
and/or had particular characteristics such as offering teachers meetings to troubleshoot and discussclassroom implementation of the program (Lynch et al. 2019, p. 284). Similarly, the use of a particular
high-quality mathematics curriculum in UK schools, along with professional development, was associatedwith the equivalent of one extra month of learning (Stokes et al. 2018).

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5-year Productivity Inquiry: From learning to growth Inquiry report

The Australian Government is already pursuing some initiatives to assist teachers in spreading best practicethrough the provision or sharing of evidence-based teaching resources by funding the Digital Technologies
Hub, Mathematics Hub and Literacy Hub, created by Education Services Australia. The hubs weredeveloped over a number of years, in collaboration with the States and Territories and a range of teachers,
academics and other subject matter experts to deliver a curated collection of resources aligned to theAustralian Curriculum. Yet most teachers still spend many hours per week developing lesson plans with alarge share reporting that available government-provided resources from their jurisdiction do not meet theirneeds (Hunter, Haywood and Parkinson 2022, p. 42).
Improved curriculum implementation support for teachers has the potential to diffuse best practice
approaches in schools, reduce inefficiencies in use of teachers and improve the consistency of teaching andoutcomes for students. Governments should work together to curate evidence-based curriculum resources
and make them available for teachers and school leaders from a single source (PC 2023, pp. 41, 197).
Resources should:• be curated by organisations with relevant curriculum expertise such as ACARA, AERO and/or Education
Services Australia• be independently quality assured based on what research says is most effective• encompass whole-school curriculum plans, whole-subject sequences, lesson plans, and classroom tools• use existing quality materials, including from the private sector, where possible• be complemented with training in how to use the material.

Recommendation 8.2
Make best practice teaching common practiceState and Territory Governments should facilitate greater classroom access for the Australian Education
Research Organisation (AERO) to support more principal and teacher involvement in education research toensure that evidence-based research provides information that is salient and readily applicable by practitioners.
Initiatives should focus on:• enabling greater observation of, and feedback on, classroom teaching practices, by supporting more
informal teacher networks, and creating or strengthening the existing roles within the local school
system for highly accomplished and lead teachers (HALT) to share their in-depth knowledge and skills
with their colleagues• increasing curriculum implementation support for teachers, by curating high-quality, evidence-based
and government endorsed curriculum resources (curriculum plans, whole-subject sequences, lessonplans and classroom tools), to be made available for teachers and school leaders from a single source.

2.3 Shaking up how schools operate
The basic model of school operation in Australia, and many other developed countries, has changed little
since it crystalised in the 19th and 20th centuries (with the exception of a gradually increased number ofcompulsory years) — with one teacher leading a class of 20 to 30 students between the hours of 9 am and 3 pm,
with some minor variations across jurisdictions. Secondary schools are much the same but with different teachers
instructing in each subject. The Australian Learning Lecture submitted that school is ‘stuck in the 1900s’ and‘school systems want learners to do the same thing, at the same time, in the same way’ (sub. 124, p. 6).
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Building productivity in schools

While this traditional model of school has worked well for some students, that does not mean it is beneficial
for all students, nor does it reflect the individualised nature of learning. Reforming school operation could
therefore influence student outcomes, by offering learning options for students who are not thriving in thecurrent system, particularly those who are not attending school or missing out on specific subjects.
Given the evidence that productivity growth in schools has typically lagged other sectors (section 2.1), there
is value in ensuring it is possible to trial or implement new models (box 2.4), or adjust the existing model,
including, for example through:••••digital delivery of lessons, to reduce out of field teachingdelivery of lessons not based on age, to enhance individualised learningchanges to school hours, to better suit student needs and preferences
increased autonomy of schools to implement alternative, innovative operating models.

Box 2.4 – Trials can identify worthwhile programs when supported by quality evaluation
Trialling potential innovative approaches to learning offers an avenue for testing the targeting, design,
implementation, and relative merits of alternative approaches before implementing them more broadly
within the school system. In the context of the school system, innovations could cater to the local needsof particular types of students or communities.
Trials can give policymakers and the public valuable information about the potential benefits,
implementation issues, and trade-offs involved in a proposed reform direction without having to incur thefull cost of broadscale reform. They can also be terminated at a much lower cost than state-wide
implementation if the expected benefits do not eventuate. However, trials should not be used as a tool bypolicy makers to simply postpone needed largescale reform.
Public schools are most likely to benefit from trialling alternative models of education as Catholic andIndependent schools currently have more scope to explore different ways of teaching and morevariations in their approach to education.
It is important that trials are properly evaluated to ensure intended objectives and outcomes are being
achieved (and cost-effectively), with lessons incorporated into future policy making (PC 2020a).

Digital delivery of lessons to reduce out of field teaching
Teaching subjects that are beyond the field of a teacher’s expertise is a perennial source of concern aboutlower quality education. Remote delivery of classes has the potential to reduce teaching out of field. While
teaching out of field can reflect a shortage of teachers, it also reflects a mismatch of teachers across43

5-year Productivity Inquiry: From learning to growth Inquiry reportschools.31, 32 There are teachers with a specialisation not teaching the subject in which they specialise, whilein other parts of the school system, there are teachers teaching that subject out of field (figure 2.6).
Interestingly, the number of teachers who have specialised but are not currently teaching their specialisation(dark blue in figure 2.6) outweighs the number of teachers who are teaching that subject out of field (yellow
in figure 2.6) (Weldon 2016, p. 4).
Using technology to deliver blended in-class and remote learning can help reduce the downsides associatedwith teaching out of field, including poor student outcomes, and additional teacher stress (PC 2012, pp. 95–
96; Shah, Richardson and Watt 2020, pp. 9–10). Online portals and video technologies offer a way ofensuring access to qualified teachers, providing a viable alternative to either denying students access tosubjects or using an unqualified teacher. Lessons could be pre-recorded or live, with pre-recorded lessons
allowing schools timetabling flexibility. Students would still require school support while studying, including
distributing resources and supervising assessments.
A similar schooling model is currently offered at Virtual School Victoria. While it is a model that caters for all
subjects to be taught virtually, it also accommodates blended learning options — that is, where students
want to maintain their current enrolment in their mainstream school, complete one or two subjects throughVirtual School Victoria that are not offered at their school or not available due to timetabling clashes.
Similarly, there are 7 state schools in Queensland that offer online education for isolated students throughout
the state, providing a wider range of subjects to choose from, including languages.
An alternative approach involves interschool, video-based collaboration where students take classes at otherlocal schools, attending lessons remotely. Once a term (or more frequently) the student could attend
in-person for one-on-one tuition with the teacher.
Some submissions to the inquiry provided broad support for remote delivery of class content to address outof field teaching (for example, Australian Investment Council, sub. 135, Australian Learning Lecture,sub. 124). AITSL (sub. 146) noted that the experience of teaching through the COVID-19 pandemic has
provided a testing ground for more effective online lesson delivery, with various models adopted acrossschools. The Australian Learning Lecture observed that:
The most effective models of learning combined intensive synchronous learning, student focused
asynchronous learning and an intentional focus on wellbeing and social connection. Thesemodels gave learners the agency and context to practise and develop the skillsets, mindsets andtoolsets necessary to thrive now and into the future. (sub. 124, p. 5)

31 Teaching out of field is often attributed to a shortage of teachers in that field, with policy responses that aim to increase

the supply of teachers. There are also broad-based solutions to attract more people to teaching generally, including
raising the profile of teaching as a valued occupation and providing a greater career pay progression. Other strategies
target support to those teaching out of field by providing a mentor or experienced in-field teacher to observe theirclassroom practices. The Commission’s Review of the National School Reform Agreement has a detailed discussion of
the rates of teaching out of field (PC 2023, pp. 205–225).
32 The mismatch is caused by the complexities of school class scheduling, autonomy and funding of teacher deployment, andthe nature of student-teacher ratio funding making it difficult for some schools, particularly small schools, to have the right mix ofteachers to cover the full spectrum of classes demanded for secondary school students (Hobbs and Porsch 2021, p. 1).
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Building productivity in schools

Figure 2.6 – Qualified but not teaching that subject while others are teaching out of field
Percentage of secondary teachers either teaching or qualified to teach, by subject
36

English54
42

Languages
33

Mathematics

9
51

8

53

13

Biology

68

29

3

Chemistry

67

30

3

61

Physics

31

57

General science
Geography

50

History

51

39
20
37

13

34

21

76

Social studies

18

45

Visual arts

8

60

23

45

16

48

6

73

Computing

20

74

Information technology

35
33
86

Outdoor education

025
Not teaching, qualified

6
12

47

Physical education

9

11

61

Health61754Graphic communication

6

47

Media
Music

4

30

44

Religious studies

8

47

50
%
Teaching, qualified

2
6

75

100

Teaching, not qualified

Source: Weldon (2016).

Delivery of lessons based on progress, not age
The ability of students to progress through their education, and absorb and benefit from more advanced
learning, will differ substantially between students. However, the way that students progress through various
year levels is a feature of school operation that appears to have changed very little over time. Students are
generally grouped by age, and progress through school together with their age cohort (Masters 2022, p. 13).
This approach is taken despite the increasing emphasis that is placed on individualised learning — students
are broadly taught the same curriculum at the same time and given the same opportunities to master thecontent before being assessed and moved on.
The downside of the conventional approach is that low-achieving students often lack the skills necessary toprogress, and fall further and further behind, confirming their lack of mastery and increasing their likelihoodof disengagement. At the same time, high-achieving students who are ready to progress to more challenging
and advanced material can be held back.
An alternative approach that sees learning as a continuous process that is flexible to the needs andproficiencies of individual students is the use of ‘untimed syllabuses’, as suggested in a recent review of the45

5-year Productivity Inquiry: From learning to growth Inquiry report

NSW curriculum (NESA 2020). This restructures the curriculum as a sequence of levels that students
progress through at their own pace:
The underlying principle is that learning is maximised when learners are presented withappropriately challenging material, rather than being under-challenged by what they already knowor over-challenged by what they are not yet ready to learn. (NESA 2020, p. xv)
Schools would still be organised in year groups, with students in each year group made up of students
working at different levels. In practice, this would likely involve a highly personalised approach to learningthat would be reliant on effective use of digital technologies (Deunk et al. 2018; Li and Wong 2021).
While teachers regularly differentiate teaching within classes as a strategy to maximise student learning,
there is no current evidence supporting the implementation of untimed or differentiated curricula at a systemlevel (Wilson 2021). At a school level, differentiation may lead to small to moderate student improvements instudent performance when it is implemented as part of a program of broader school reform including
appropriate teacher training and implementation of technology (Deunk et al. 2018).
In an ongoing quest to improve student outcomes, it may be worth trialling untimed syllabuses in Australianschools to shore up the skills of lower-achieving students and extend the capacity of those at the higher end.

Adjust school hours to better suit student needs and preferences
The current school hours have been broadly in operation for many years — set at a time where society’s
norms, knowledge, and economy were very different. A variety of reasons have been put forward as to whycurrent school hours may not be appropriate — particularly for student learning and parents’ labour force
participation.33 The focus in this report is on whether adjusting school hours would alter student outcomes,
while acknowledging that there could be other labour market participation and productivity impacts.
State and Territory Governments are responsible for setting school hours. While all jurisdictions allow
individual schools to determine specific times based on local factors, the usual school day is about 6 to 7
hours (8:30-9:00 am to 3:00-3:30 pm).34 Despite this autonomy, school changes to start and finish times
generally appear to be minor — within 15 minutes to half an hour of the usual time. This can be toaccommodate local bus timetabling, for example.
Most schools making more substantial changes to start and finish times are secondary schools, although thisalso occurs at other levels. For example, one primary school, Merrylands East Public School, operates from8:00 am to 1:15 pm, with playground supervision from 7:30 am. It has a recess break and no lunch break but
offers the same amount of teaching time as public schools. Internationally, there is considerable variation inschool hours. At a national level, some countries have longer school hours than the Australian standard day,with Hong Kong, Taiwan and South Korea, averaging between 7.5 and 8.5 hours a day (NCEE 2018). In
other countries, decisions about school hours are made at a local level. Academies in the UK, for example,
were established to provide greater autonomy, which could include increasing school hours if they think theirstudents would benefit (Hutchings and Francis 2018, p. 8).
Some have proposed extending the school day to broaden the range of subjects and activities students
could explore (Strahle 2016). For example, it could allow students to explore hands-on science, engineering,music or arts. The New South Wales Government is trialling extended operating hours with a focus on
33 The primary purpose of schooling is teaching and learning. Students being supervised is a by-product of the timespent at school learning, although supervision is more relevant for younger primary school children than older students,
particularly high school students. Nevertheless, students attending school allows for parents and carers to work.
34 Independent and Catholic schools set their own start and finish times, but these are broadly similar to public schools.
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Building productivity in schools

broadening the activities in which students participate and supporting parental participation in the workforce(White 2022). For some schools and some topics, the current after-school hours care model could offer abasis for integration of a broader range of activity opportunities.
Others have proposed longer school hours to support learning, particularly for those that are falling behindlearning benchmarks. This has garnered interest in recent years with disrupted and lost learning opportunities
due to COVID-19 (Kim and Ashbury 2021; Weale 2021). Owing to the cumulative nature of learning, students
that have missed learning foundational concepts will struggle to keep up. The United Nations agency, theAccelerated Education Working Group, recommends extending teaching time as an appropriate strategy when
pupils have missed out on up to one year of education (AEWG 2021, p. 6,19). Schools could use the additional
hours of instructional time to provide extra support to students struggling in specific subjects.
However, matching resources with students’ needs and making optimal use of that time and other resources
are central to realising a student’s learning potential (OECD 2021b, p. 330). The decision to lengthen theschool day needs to take into account the costs and benefits.
Further, the benefits of longer school days are contingent on what happens during the longer hours — whether
that be improved learning or exposure to cocurricular activities that are more efficiently and equitably provided
at school. Extending hours may also reduce stress on harried parents trying to balance work and their children’s
needs, increasing parental labour force participation rates and potentially reducing the need for after-school
hours homework. However, if managed badly, none of these benefits are likely to materialise. The Australian
Learning Lecture suggested that rather than extending hours, classroom time could be reduced instead:
In addressing the productivity issue, we need to reconsider the curriculum and cut compulsory
face-to-face learning hours for students, to enable teachers to design more personalised andresponsive student learning, and give students more control over their learning and deepen theirlearning. Teachers also need time to reskill for our changing world. (sub. 124, p. 7)
Whatever their benefits, alternative school timing options would need to be traded off against the associatedimplications for salary costs of teachers and other staff, and the value for children of time spent on otheractivities outside of the school environment.

Increasing autonomy of schools to adapt to local needs
Rethinking approaches to schooling that are not working in certain cases may justify a more fundamental
change to the school model, as has been observed in Australia (for example the Nawardekken Academy inWest Arnhem Land, box 2.5), and overseas (for example, charter schools in the US, and academies in theUK, box 2.6). The Australian Investment Council recommended fast-tracking the establishment of dedicated
STEAM (Science, Technology, Engineering, the Arts and Mathematics) schools, another example ofinnovation in the school model (sub. 135, p. 4).
State-funded autonomous schools may provide opportunities to innovate in education services, particularly
where the standard model of schooling is not flourishing. Part of the rationale for increased autonomy is thatit should provide increased opportunity for innovation in the delivery of education services. In urban areas,
autonomous schools may also provide competitive pressures that inspire improvement in government-run
schools, although there is limited evidence for this (Gill 2016).
Academies and similar autonomous schools aim to improve the results of disadvantaged students they
serve. While evidence is mixed, they have largely been able to at least match the performance of thenational average (Hatton and Drake 2019; Worth 2016). However, they appear to benefit certain cohorts ofstudents more than others and it is difficult to find evidence that is applicable to all academies and charterschool students while having confidence in the direction of causation. It is also unclear what drives the
improved performance of academies.

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5-year Productivity Inquiry: From learning to growth Inquiry reportBox 2.5 – Nawarddeken Academy as an example of innovation
Nawarddeken Academy is an Independent primary school that provides full-time education from teachersand Aboriginal elders. In 2015, the Kabulwarnamyo campus, based in an outstation in west Arnhem landwith a population of just over 50 people, was established using a grant from the Karrkad Kanjdji Trustand Gunbalanya School (Vivian 2022). It was not until 2019 that it was able to register as an
Independent school making it eligible for recurrent funding from the Australian Government(Nawarddeken Academy 2020). In 2022, two further campuses at Manmoyi and Mamadawerre were
established (Vivian 2022).
The genesis of Narwaddeken Academy lies in an Indigenous ranger program established in part byrecognised artist, Elder and traditional knowledge holder, Bardayal ‘Lofty’ Nadjamerrek OAM. Indigenous
rangers sought education for their children to be delivered on country so that they would not have toleave their children with family in larger towns.
‘Country as classroom’The school uses a ‘both ways’ approach that emphasises ‘respect, and the ability to integrate customarymodes of learning guided by our old people with a ‘western’ educational curriculum’ (Nawarddeken
Academy 2020, p. 7). In doing this, the Academy seeks to, among other things:• empower young people to be strong and confident in western and Indigenous knowledge systems• preserve Nawarddeken languages and culture through bilingual and bicultural experiential learning.
Nawarddeken Academy uses a curriculum based on the concept of ‘country as classroom’ which links
people’s desire for environmental and social outcomes on their own land with an alternate school
education that works for their children. The unique curriculum is based on:[O]ur land, language and culture, using formal and informal teaching and learning
approaches; emphasising mental and physical health, while cultivating individual andcollective respect and responsibility. (Nawarddeken Academy 2020)
This approach simultaneously recognises that ‘education that is not connected to the reality of a
student’s life will fail’ (Fogarty 2012), and the ‘importance of country in the social and economic fabric ofeveryday life in remote communities’ (Fogarty and Schwab 2013, p. 13). Implementation of this approach
saw attendance rates of between 78 and 93% over the four school terms in 2020 (Nawarddeken
Academy 2020), and increased student engagement (Masters 2021). By comparison, the student
attendance rate for years 1-10 was 53.7% for Aboriginal and Torres Strait Islander students in very
remote areas of the Northern Territory in 2019 (SCRGSP 2022).

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Building productivity in schools

Box 2.6 – Academies and charter schools allow for different approaches in schooling
English academies
The academy program started in 2002, and over two decades has become the predominant model ofsecondary school in England, making up about 80% of secondary schools, and educating about 79% of
secondary students (National Statistics (UK) 2022). Overall, 40% of all schools are now academies, with morethan half of English students (53%) now attending an academy (figure) (National Statistics (UK) 2022).
The charter school sector in England continues to growa
100

Number of schools

Number of students

%

75

50

25

0
2017

2019

2021

2017

Local Authority

Independent

2019

2021

Academya. Figure contains data for both primary and secondary schools and students.
Source: National Statistics (UK) (2022).

Academies have typically replaced poor-performing secondary schools located in areas withconcentrated social disadvantage. An ‘academy trust’ administers the school and has the autonomy tovary ‘curriculum, school year, staff pay and conditions of service’ (Hutchings and Francis 2018, p. 8).
They are independent, non-selective in their student intake and state-funded, and are generally
sponsored by philanthropists or business partners seeking to improve local education.
Charter schools in the United States
The degree of autonomy accorded to charter schools varies by state, but they are typically unable to be
selective in their student intake and unable to charge fees for schooling (Epple, Romano andZimmer 2015, p. 2). Where there is an excess of demand for charter school services, students are
typically chosen through a lottery process. Since 2009, the proportion of all public schools that werecharter schools has increased from 5% to 8%, making up about 7500 schools across the United States.
Despite not legally being allowed to be selective in their student intake, charter schools are notnecessarily representative of the general population. Compared with the national average, they tend tobe: more ethnically and racially diverse, with higher shares of Hispanic and African-American students;
lower proportions of students that speak English; and, lower proportions of students with special needs.

495-year Productivity Inquiry: From learning to growth Inquiry report

Advocates highlight the increased ability of autonomous schools to meet the unique circumstances andneeds of the community in which they operate, while detractors tend to attribute success to the practice of
academies becoming more selective in their student intake (and barring students who would otherwise bring
down results). Submissions to the inquiry did not shed further light on the evidence for or against
autonomous schools, such as charter or academy models. These models represent just two examples thathave arisen from giving schools increased autonomy to adapt to local needs.
There may be some benefit in trialling state-funded but privately administered schools as an alternative whenpublic schools are not meeting the needs of their local community or the needs of a particular cohort ofchildren — indeed, this is what has already been done with the establishment of the Nawardekken Academy.
Moving forward, State and Territory governments should ensure there are no barriers to experimenting withalternative, new and innovative school models, where there is a justification to suggest a particular model
could improve student outcomes. The Productivity Commission is not advocating a particular model — given
the lack of evidence suggesting that one approach is more favourable to others if applied in an Australian
context — but rather supports a policy environment that encourages experimentation and new innovations
designed specific to local needs, preferences, and objectives.

Recommendation 8.3
Enable experimentation with alternative approaches to schoolingState and Territory Governments should be open to experimenting with new, innovative school models or
operational changes where there is an evidence base (including overseas) to suggest outcomes could be
improved for Australian students.
In the first instance, legislative, regulatory, administrative or policy barriers that would prevent individual
schools varying their operating model should be removed. In addition, there should be capacity andappropriate resourcing within the local school system to allow the merits of any trials to be evaluated.
Innovations should aim to:• offer different lesson delivery options to lift quality teaching and learning, including for example, offering
online classes in the absence of a teacher with the relevant expertise in a topic, or trials of untimed
syllabus approaches to promote a continuous learning process• better cater to student needs to encourage school attendance and lift student outcomes, including
through variations in school hours and use of technology to personalise students’ learning environment.

50

Investing for future skill needs

3.

Investing for future skill needs

Key points
Rationing places in tertiary education — through skill lists or provider funding caps — impedes efficient
skill acquisition by limiting access or distorting course choice. Concerns about fiscal costs are better
addressed through other means, such as changes to subsidies or expanding income-contingent loans.
The Australian Government should return to demand-driven funding for Commonwealth supported
places for domestic undergraduate university students.
• Demand-driven funding would allow the sector to better support workforce needs, facilitate competition, andavoid perverse incentives to enrol students in courses that do not align with skill needs.
• Reaping the benefits of a demand-driven system will hinge on measures to contain fiscal costs and ensure
all students are adequately supported to complete their studies, or if appropriate, to ‘fail fast’.
Subsidy allocations need to be recalibrated to improve efficiency and equity.
• Currently, governments set subsidies based on targeting public benefits and skill needs, but these have little
impact on student choice and many students receive large subsidies despite large private benefits.
• Instead, student contributions should be set based on average expected earnings for each field of study, withmore of the costs paid by those that benefit from study rather than the broader tax base. The government
subsidy should cover the gap between the student contribution and estimated cost of delivery.
Unlike students, providers are highly responsive to course prices. Setting prices to better reflect course
delivery costs would encourage providers to meet skill needs and dampen incentives to prioritise
enrolments in high margin courses.
Expanding loan access for vocational education and training (VET) students would reduce barriers toparticipation, but would need to manage the risks of abuse seen under VET FEE-HELP.
• All Diploma and Advanced Diploma courses should be eligible for VET Student Loans, except those primarily
taken for leisure or with poor labour market outcomes. Following an evaluation, expansion to Certificate IV
and Certificate III qualifications should be considered.
Labour market trends suggest a growing need for upskilling and reskilling given changes in the natureof work and structural shifts in the economy, particularly the rising importance of digital, dynamic, andservice oriented skills. Policies supporting learning later in life should be consolidated to avoid
overlaps and gaps, and to target barriers to uptake.

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5-year Productivity Inquiry: From learning to growth Inquiry report

Investment in tertiary education — primarily provided by government directly or through loan programs andstudent contributions — is critical to developing the skills of Australia’s workforce (chapter 1). This chapter
explores whether current settings are well-designed to support the sector’s growing importance in meetinglabour market needs and driving Australia’s long-term productivity. While the tertiary sector has generally
performed well against key metrics (chapter 1), there are significant opportunities for improvement.
Australia’s tertiary system is bifurcated, with vocational and higher education funded, regulated, anddelivered separately and provision continuing to overlap. Governments use broadly similar levers acrossboth sectors to influence investment, but these are implemented in distinct ways (table 3.1).
Table 3.1 – Differences in regulating, funding and financing VET and higher education
How
govts …

Vocational education and training

Higher education

Regulate• Primarily S & T government responsibility• Primarily Australian Government responsibility

the sector•• Most qualifications at AQF 5-10

Most qualifications at AQF 1-6a

• Admission to individual provider, or throughemployer for apprenticeship pathways• ASQAb responsible for regulating national
minimum standards and compliance with the VET
Quality Framework• S & T governments regulate quality standards offunded providers through contracts
Regulate
places• Applications for admission centralised for the
majority of school leavers• TEQSA responsible for regulating national
minimum standards• Some providers (mostly universities) self-accredit
qualification content, and TEQSA regulatesmaterials for most non-universities• Mostly competency-based assessment.

• Proficiency-based assessment.

• S & T governments manage demand through a• Places not directly set but constrained by the‘skills list’ of courses eligible for subsidies, but also

maximum basic grant amount. Universities cancap subsidised places for certain courses orenrol more students but do not receive aregistered training organisations (RTOs).

government contribution after reaching the
maximum basic grant amount.c

Set course • Prices not regulated in most jurisdictions, but
pricessome set maximum or minimum prices.

Set• Maximum prices for undergraduate courses set
based on median cost of delivery.

• Government subsidy varies based on skill• Government subsidy varies based on national

subsidiesshortages and economic or social returns.

priorities and estimated employment prospects.

Allocate• Subsidised providers contracted by the relevant

funding

S & T Government.

• Subsidised providers block funded throughCommonwealth Grant Scheme (CGS).

Offer loans • Australian Government administers VET Student • Australian Government administers Higher
Loans and Trade Support Loans• Loans available for Diploma and above, only forcertain courses with industry need. Full fee-paying

Education Loan Program (HELP)• Loans available to all domestic students, somefull-fee-paying students incur a 20% loan fee.

students incur a 20% loan fee.
Fund other • Governments fund apprenticeship support, as well • Contingent funding for equity groups through theprograms

as employer assistance for apprentices.

Higher Education Participation and Partnerships
Program (HEPPP).

a. Australian Qualifications Framework. b. ASQA regulates about 90% of RTOs, including those operating acrossjurisdictions or delivering training to international students. RTOs delivering training only to local students in Victoria andWestern Australia are regulated by state-based bodies (the Victorian Registration and Qualifications Authority and theWestern Australian Training Accreditation Council). c. Demand-driven funding applies to Aboriginal and Torres Strait
Islander students who live in regional and remote Australia.

52

Investing for future skill needs

Participants noted the stark differences in arrangements between the sectors. Expressed bluntly:… Australia’s tertiary education space is a dog’s breakfast. It’s as if VET comes from Mars andhigher education from Venus. … We have a qualification classification that separates VET andhigher education. We have two regulatory bodies, with quite different ways of operating. We havefunding arrangements which reflect history rather than logic. We have fee and loan arrangements
which are all over the place. (Tom Karmel, Sub. 197, p 5)
If one were starting from a blank slate, the tertiary education sector would almost certainly be designed morecohesively. However, the practical reality is that the VET and higher education sectors have evolved in vastlydifferent ways over time. In large part this is because State and Territory governments play the dominant rolein VET, while the Australian Government is the principal funder and regulator of higher education.
In this historical context, steps toward greater consistency should not be taken arbitrarily and need to haveexpected benefits that justify the costs and disruptions associated with any change. For example, whilesome have called for a single tertiary sector regulator, ASQA and TEQSA (the VET and higher education
regulators) largely oversee separate markets with different types of institutions and risks. The greatest gains
are likely to be achieved by streamlining regulation for dual sector operators (as advocated by IHEA,
sub. 120, pp. 8–9).
Another key priority is the reforms to the Australian Qualifications Framework (AQF) recommended in the
Noonan review. These reforms were also supported by the Bean-Dawkins Review of University-Industry
Collaboration in Teaching and Learning and several submissions to this inquiry (for example, AiGroup,
sub. 179, p. 6). Reforming the AQF would go some way in breaking down barriers and improving pathways
between the sectors; as well as recognising the growing importance of microcredentials and the increasingneed for generalised capabilities in the workplace. The Productivity Commission has not considered the AQF
in detail as part of this inquiry, but encourages continued momentum in reforming the AQF.35
For this chapter, the Productivity Commission has focused on government investment (figure 3.1).
Investment has a pervasive influence on the operation of providers, the choices of students, the outcomes
within Australia’s tertiary system, and therefore labour market and social outcomes more generally. As theseissues often manifest in similar ways across sectors, each section considers both VET and higher education.
However, given the recent review of the National Agreement on Skills and Workforce Development proposed
many reforms to VET funding, there is more focus on higher education in the recommendations in
sections 3.1-3.3. Still, section 3.4 recommends greater harmony in loan settings between the VET andhigher education sector.36 Finally, section 3.5 considers the role of government support in fostering a cultureof lifelong learning, covering both sectors.
Although international students play an important role in the tertiary education sector and the Australianeconomy, they are not a focus of this chapter, which considers access to tertiary education for domestic
students. While international students have a bearing on productivity if they transition into the skilled

35 Implementation has been slow, in part, as it requires agreement between Australian, State and Territory governments;

and across school, VET, and higher education sectors. A cross-jurisdictional working group has been established todevelop and provide advice to Skills and Education Ministers about addressing AQF Review recommendations, withadvice expected in 2023 (pers. comm. Department of Education, December 2022).
36 This is consistent with the views of many participants in this inquiry, who cited access to financing as the most salient
discrepancy in policy settings between the sectors, with implications for student choice.
53

5-year Productivity Inquiry: From learning to growth Inquiry reportmigration intake, most (84%) do not stay in Australia long-term after studying (Treasury and Department ofHome Affairs 2018, p. 21).37
Figure 3.1 – Investing for future skill needs

Section 3.1

Expanding tertiary places

Section 3.2

Recalibrating funding

Section 3.3

Setting cost-reflective prices

Provider revenue per student

Section 3.4

Increasing loan access

Income-contingent loans for more students

Section 3.5

Supporting lifelong learning

Targeted government support

3.1

Uncapping places to meet skill needs

Student contribution Gov’t contribution

Meeting demand for a more educated workforce

Education improves productivity and brings broader benefits to the Australian community (chapter 1).
However, government investment in education needs to be efficient — it is not just the aggregate level that
influences productivity and public benefits, but also how it is spent and targeted. Subsidies and loans thatdiffer across courses and sectors (VET and higher education) may influence choices about whether andwhere to study. Appropriate funding settings can encourage students to pursue education with long-term
individual and societal benefits. But poorly targeted funding can lead to students studying courses that are apoor fit, resulting in lower completion rates, lifetime earnings, and productivity growth.
The public benefits from investing in education are sizeable, but there is also an opportunity cost — investment
in supporting students must be funded by taxpayers and, like other government investments, funding canalways be used elsewhere.38 As such, there is a finite capacity for public investment in tertiary education.
Saying this, policies should allow equally able students to attend regardless of their background and financial
situation.39 Educational attainment is often determined by factors other than innate ability or potential public
and personal gains. Health, familial responsibility, financial situation and other circumstances can limit
students with high potential. Continuing support for such students is essential for an equitable system.
37 Pathways to permanent residency are discussed further in this inquiry’s companion volume ‘A more productive

labour market’.
38 Additional investment in education requires either raising funds through taxes — which have distributional impacts andcan distort economic activity (for example, income taxes reduce labour market participation) — or reducing funding fromother government services and payments, such as healthcare, transport, or welfare payments.
39 The quality dimension of the student experience also becomes increasingly important to outcomes as the student body
becomes more diverse (chapter 4).
54

Investing for future skill needs

Due to the finite capacity of governments to subsidise tertiary education, all governments use mechanisms tolimit financial outlays. Many State and Territory governments partly or fully cap funded places available intheir training programs (PC 2020c, pp. 454–468), and the Australian Government limits the total funding
available for each university, which effectively acts as a cap on places (DESE 2021c).40

Demand for tertiary-educated workers continues to grow, meaningpressure on government budgets or students missing out
The growth in Australia’s educational attainment — with over half of 25-34-year-olds now holding a tertiary
qualification — has contributed to productivity growth (chapter 1). But despite record participation, demand
for tertiary-educated workers is still growing as Australian businesses require new skills to operate in an
increasingly digital and service-oriented economy. This suggests that the tertiary sector will need to ensurethat it has capacity to provide up to date initial qualifications and support upskilling and reskilling. A moreeducated workforce will also position Australia to better take advantage of worldwide skill-biased
technological change, as a more attractive location for businesses employing highly skilled workers.
Further, there are demographic pressures on the sector, which are insufficiently factored into planned
funding growth.41 The population of post-school students will grow, with an expected 15% increase in thenumber of 19-year-olds in the decade to 2030 (chapter 1). This growth means governments will either haveto accept a smaller proportion of young people attending tertiary education, spend significantly more, or alterfunding structures to allow more places to be delivered for the same fiscal cost.
Forecasts of jobs growth for university-qualified roles exceed the forecast growth of additional university
places by a factor of 8:1 by 2026.42 However, this is not a like-with-like comparison, as the forecast growth injobs includes all workers with a bachelor’s degree or higher, not just new graduates. This gap mightotherwise be met through students supported under current funding arrangements, skilled migration
programs, and through better allocation of skilled workers. Nonetheless, current settings mean the tertiary
sector will not adequately support future skill needs and productivity growth.
From an economy-wide perspective, short-term fiscal constraints alone are not a strong rationale for limiting
places in tertiary education. Limiting places reduces long-term human capital development, productivity
growth and the economic opportunities of some — for the short-term benefit of the taxpayer.43

40 Places in Medicine are specifically capped by the Australian Government, but restrictions on full-fee domestic

undergraduate places, combined with the maximum funding amounts for universities can effectively constrain places
each year (DESE 2021c).
41 This point was also made by many participants in this inquiry — both those in the sector and employer groups (AEU,
sub. 21; NTEU, sub. 36; ACCI; sub. 47; Master Builders Australia, sub. 58; Universities Australia, sub. 70; Regional
Universities Network, sub. 154; Group of 8, sub. 187; Science and Technology Australia, sub. 188). On this basis, someadvocated a return to demand-driven university funding (Australian Investment Council, sub. 135).
42 Commission estimate based on NSC (2022b) and Warburton (2021, p. 6). The number of university places is not set
directly, rather the Australian Government sets a maximum basic grant amount for each university. Actual places dependon course enrolments, given the different Commonwealth contribution levels by field of study.
43 Notwithstanding, there remain good reasons for careful management of education and training programs from a fiscal
perspective. This has been demonstrated by the experience of budget blowouts and subsequent cuts under recent policy
experiments, posing risks to the quality of education and the life outcomes of students. These issues can occur even in
more constrained programs, as recently occurred with the ACT’s Skilled Capital training initiative (Jervis-Bardy 2020).
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5-year Productivity Inquiry: From learning to growth Inquiry report

Lessons from past expansions need to be heeded
Several recent government policies have changed tertiary education access settings. The ‘demand-driven’
university system between 2010 and 201744 resulted in a place for every domestic undergraduate studentthat universities decided to enrol (PC 2019, p. 19). This significantly increased university participation, from
53% to 60% between 2010 and 2016 (PC 2019b, p. 49) but funding caps were reintroduced due to budget
concerns — discussed further below.
Similarly, the national entitlement to training implemented in the VET sector meant each jurisdiction
implemented their own version of an ‘entitlement’ to a Certificate III or above.45 The most expansive and‘demand-driven’ was the Victorian Training Guarantee. This policy was successful in significantly expanding
access and providing greater choice of qualifications for students, but also led to major budget and quality
concerns, resulting in the recapping of course places, and major funding cuts to VET in Victoria(Hetherington and Rust 2013). Other States and Territories implementing the training entitlement also hadsignificant increases in enrolments, such as South Australia’s Skills for All (ACIL Allen Consulting 2015), but
subsequent programs in other jurisdictions were more tightly constrained (PC 2020c, p. 148).
Budget blowouts occurred under these policies, threatening their political viability and prompting
governments to search for savings elsewhere in the system. This sometimes involved reductions in theamount providers received for each student, with risks to the quality of education.
Fiscal costs do need to be controlled, but this can be better achieved by recalibrating subsidy and loansettings so that more of the costs are borne by students rather than reducing overall funding below the levelthat is needed to deliver a high-quality education. If done well, this can equitably share the costs ofexpanding access to education without deterring potential students from study or distorting student choicewithin or between VET and higher education (section 3.2, section 3.4).
Sustainably expanding places requires careful consideration of the balance of places and other policy
settings across VET and higher education. For example, the introduction of the demand-driven system inuniversities coincided with a decline in VET enrolments, although the complex factors affecting enrolments ineach are difficult to disentangle. To the extent that VET and higher education are substitutable pathways forsome students, expanded access should be considered with reference to both sectors to avoid shifting
students from one sector to another due to policy settings rather than students’ capabilities and interests.
This is challenging given the separate determination of funding allocations between VET and higher
education — with differing Australian, State and Territory government responsibilities.
The barriers to educational attainment and the paths to improve investment also differ across the university
and VET sectors. In higher education, caps on places are largely determined by government investment withlimited scope for domestic students to undertake fee-for-service undergraduate study at public universities.46
44 The demand-driven system involved a 5% increase in the cap on student numbers in 2010 and 2011. Places werethen fully uncapped from 2012 to 2017 for almost all fields of study. Funding was frozen in 2018 (PC 2019, p. 5).
45 The national training entitlement was agreed to by the Council of Australian Governments in 2012 as part of therenegotiation of the National Agreement on Skills and Workforce Development and the National Partnership Agreement
on Skills Reform. Under this agreement, State and Territory governments committed to establishing or expanding
existing training programs to improve VET access and affordability. As part of this, the Australian Government also
expanded VET FEE-HELP to provide ICLs for Diploma and above courses, which was subsequently wound back andabandoned due to escalating costs and rorting (PC 2020a, p. 84-85).
46 Undergraduate domestic full-fee places are only available to students who are not eligible for a Commonwealth supported
place, for example, an Australian Citizen who is living overseas while studying, or international students who were granted
permanent residency during their course of study (The University of Melbourne nd; The University of New England nd). In
2020, about 0.8% of total domestic student places were fee-paying bachelor’s degrees (Universities Australia 2022).
56

Investing for future skill needs

In VET, where students can pursue fee-for-service training (and fee-for-service enrolments outweighgovernment-funded enrolments), limited loan eligibility may be the main constraint on demand.
Increasing access to vocational and higher education simultaneously, including through expanding loan
access to more VET courses (section 3.4), would help prevent any ‘residualisation’ of VET that may haveoccurred under the demand-driven system. This would be complemented by reforms that have been initiatedto improve the quality and relevance of the VET system (chapter 4).

Funding places to meet demand brings clear benefits
Expanding places in line with demand has three key benefits.
• Additional students experience considerable employment and income benefits from attending tertiary
education, and this is particularly so in the context of an imminent spike in school leavers and continuing
growth in jobs requiring tertiary qualifications.
• The current approach to public funding of universities stymies competition, while a demand-driven systemallows greater flexibility for funding to follow the student.
• The current approach also creates an incentive for providers to enrol students in certain courses that may
not align with skill needs, which can be eliminated in a demand-driven system.
Each of these is discussed in turn below.

Greater access to tertiary education will benefit students and productivity
Tertiary education comes with significant costs, including government subsidies and students’ time, debt,
and forgone earnings. In most cases, the benefits to students and society exceed these costs (chapter 1).
But expanding access is only worthwhile if this holds true for those students who would not otherwise haveenrolled (‘additional’ students).
Demand-driven university funding (in place until 2017) attracted many such additional students — with theshare of young people attending university by age 22 years increasing from 53% in 2010 to an estimated
60% in 2016 (PC 2019b, p. 49). The Productivity Commission analysed the performance of these additional
students, comparing their performance to that of ‘other’ students who would have attended university without
the policy. Most additional students seemed to see significant benefits from the demand-driven system.
When comparing outcomes against other students, additional students did perform worse on somedimensions, with a significantly higher proportion dropping out — 22% rather than 12%. However, these
additional students faced more hurdles, for example being more likely to have a lower SES background, be
the first in their family to attend university, and have a lower Australian Tertiary Admissions Rank (ATAR).
Given these challenges, additional students performed quite well. By age 25 years, they were equally as
likely to be in full-time employment as their more advantaged counterparts, and most had found managerial
or professional employment.47 Earnings differences were modest (PC 2019, p. 7).
The most relevant question is not whether outcomes for additional students are worse than those of the average
student — this is to be expected. Rather it is whether the additional students would have been better off pursuingother pathways, such as VET, and whether the costs of their participation outweighed the overall benefits. This is
more challenging to answer, and the Productivity Commission was not able to do so conclusively with available
data. However, it is reasonable to infer the investment would have paid off for many given the high proportion of
additional students who found highly-skilled work, and the fact that earnings grow by a much greater extent over

47 Overall, including those who tried university and dropped out.

57

5-year Productivity Inquiry: From learning to growth Inquiry report

the career of higher-skilled workers (chapter 1). The demand-driven system also helped a larger share of young
people, particularly disadvantaged students, to acquire skills that were valuable to the Australian economy.
This is further supported by international analyses that more directly estimate the benefits of higher educationfor ‘marginal’ students.48 These studies generally find that returns to university attendance for marginal students
are similar to or greater than returns to other students (box 3.1) — results that, to the extent they are
generalisable to Australia, imply the benefits of expanding access are well in excess of the costs.49
Dropout rates for marginal students are the greatest concern. However, it is difficult to determine from theoutset which students are likely to succeed, and, for many, there can still be some benefits from partial
completion of studies, even if it is not the optimal outcome (chapter 4). Policy reforms have the potential toreduce the costs of attrition through better support and quality teaching or, if dropping out seems highly
likely, facilitating ‘failing fast’ (chapter 4).
In the short term, given the upcoming growth in the university-age population, most additional students arelikely to be quite similar to many current students in terms of academic preparedness. In the medium term,
expanded access is likely to include a broader base of additional students.

Box 3.1 – The returns to education are high for students at the margin of attendance
The magnitude of the total social returns from ‘marginal’ students depends on their lifetime outcomesfrom participation in higher education compared with an unobserved counterfactual. This is different fromthe comparison of marginal students with those who would have attended anyway. For example, amarginal student with lower innate ability may well obtain a lower lifetime income than other students, butalso have a greater lifetime income than they would have had they not attended (for example, because
they would have been employed in a precarious low-paid low-skill job).
International evidence provides estimates of the effect of higher education for marginal students using various
natural experiments (although which students are ‘marginal’ will differ depending on the context and empiricalapproach). These studies, in effect, allow comparisons between students who are identical in every respect,
except that some have attended university and some have not. This research generally finds that benefits for
marginal students are similar (and sometimes higher) than for other students (Deming 2022).
For example, gaining attendance to the worst-ranked public university in Florida increased marginal
students’ earnings by 22% (Zimmerman 2014). Marginal students at 4-year universities in China saw
attendance increase their earnings by 40-60% (Fan et al. 2010). Gaining admission to 4-year colleges inSouth Korea increased hourly wages by about 68% (Kim 2021). In these studies students who were notadmitted typically attended other tertiary institutions — which may differ from VET institutions in Australia.
Other studies use natural experiments resulting from funding, financing, or dismissal policies to focus on theeffect of university completion, rather than attendance. These studies also find substantial earnings benefits
for students who would not be able to complete their studies but for these policies (Bettinger et al. 2019; Blacket al. 2020; Chu and Cuffe 2021; Denning, Marx and Turner 2019; Ost, Pan and Webber 2018).

48 Marginal students are on the margin of attending — those who attend university but would not if access were slightly

narrower, and those who do not attend but would if access were slightly broader. This cohort will differ in each context.
49 Noting the empirical evidence suggests that signalling explains, at most, a modest share of the returns to
education (chapter 1).
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Investing for future skill needs

One risk of an unconstrained system is that it could encourage ‘overskilling’ or ‘overeducation’ — additional
education that may be unnecessary and merely a form of credentialism.50 However, if and where this is occurring,
it is unclear how much this is being driven by tertiary education policy (and concerns over credentialism typicallyrelate to post-bachelor education, which is not directly affected by demand-driven funding). Other culprits could
include increasing regulatory barriers to entry in certain professions and labour market conditions.

Funding allocation may inhibit competition
Across both VET and higher education, funding is often capped and allocated to providers based on
historical grant allocations, rather than contestable arrangements.
• In VET, TAFEs receive significant block funding in some jurisdictions, but a lack of transparency onfunding arrangements (and a lack of comparability across jurisdictions) makes this difficult to estimate.
• In higher education, the majority of funding for teaching is allocated through grants under the Commonwealth
Grants Scheme, equivalent to $7.7 billion in 2020, or 42% of total Australian Government financial assistance(DESE 2021a).51 Under the Commonwealth Grants Scheme, a university holds a funding agreement with theAustralian Government, with a maximum basic grant amount (MBGA) set for each year based on the funding
for student places the university received at the end of the demand-driven system in 2017.52
The impacts on competition vary across the tertiary sector.
In the VET sector, although many students do not receive government funding, those that do tend to study at
TAFE (figure 3.2). As a result, a small number of providers receive the majority of government funding.
Despite this distribution of funding, there is a reasonable degree of competition within VET, with 87% of
students having a choice of registered training organisation (RTO), 30% of students studying in highly
competitive markets and 20% in moderately competitive markets (PC 2020a, p. 94). This reflects theemphasis since the 1990s on reforms to increase competition between RTOs. Indeed, about 4000 RTOs
service VET markets, compared with the 194 higher education providers delivering qualifications(TEQSA 2022c).53 However, there is scope to increase the role of contestable funding given that somejurisdictions still prioritise public providers (PC 2020a, pp. 290–294).

50 Concerns regarding the poorer labour market experience of recent graduates might point to issues with overskilling,

given evidence of higher rates of underemployment, lower average incomes and less employment in high-status
occupations, compared with previous graduates (de Fontenay et al. 2020; PC 2020d). However, falling average labour
market outcomes of graduates do not imply that the marginal student would not benefit from attending education. Rather
this points to the importance of macroeconomic stabilisation policies.
51 An additional $6.1 billion of assistance is provided to universities through loan schemes, equivalent to a further 33%.
While the loan component is somewhat ‘activity-based’ (albeit constrained by universities’ maximum grant amount) andthe majority is ultimately paid by the student, the total value of the CGS and loan contributions account for over 75% of
total government assistance provided to universities (including government funding for research).
52 7.5% of CGS funding is also intended to be performance-based, discussed further in chapter 4.
53 Based on the national register of vocational education and training (training.gov.au) as at January 2023.
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5-year Productivity Inquiry: From learning to growth Inquiry report

Figure 3.2 – Private RTOs deliver more VET, but the majority of government-funded
students attend TAFEsa
VET program student enrolments, by funding type

Private RTOs
The majority of students receiving

TAFE

government funding go to TAFEs
Community
Schools

Universities
0

100

200

300

400

500

600

700

Number of students - full year training equivalent (thousands)
Government funded

Domestic fee-for-service

International fee-for-service

a. For government-funded students, the amount of subsidy provided for each course varies by State or Territory,
depending on the specific subsidy program in each jurisdiction.
Source: NCVER (2022c) VOCSTATS — Total VET Activity data.

In the university sector, the spread of funding allocated through the Commonwealth Grants Scheme acrossthe 37 public universities appears more evenly distributed than in VET (figure 3.3). But the spread of total
funding is more concentrated after accounting for research funding and revenue from international students.
Given the powerful branding of research-intensive universities, this may further entrench incumbency. And
unlike VET where there is a broad diversity of providers in the fee-for-service market, non-university higher
education providers service less than 10% of full-time domestic enrolments (DESE 2022d).

60

Investing for future skill needs

Figure 3.3 – A small number of large universities
Total university revenue by source, 2020
2500

Other upfront fees
Group of EightInternational students
Other Government funding

Revenue ($ millions)

2000

1500

AustralianTechnology
Network

Loans
Innovative
Research
Universities

Commonwealth Grants Scheme
and Other Grants

Unaffiliated Universities
Regional
University
Network

1000

500

Charles Sturt University
University of Southern Queensland
Central Queensland University
University of the Sunshine Coast
The University of New EnglandSouthern Cross University
Federation University Australia

Batchelor Institute of Indigenous Tertiary Education

Monash University
The University of Sydney
The University of Queensland
The University of Melbourne
The University of New South Wales
Australian National University
University of Adelaide
The University of Western Australia
Deakin University
RMIT University
Curtin University of Technology
University of Technology, Sydney
University of South Australia
Western Sydney University
Griffith University
La Trobe University
Flinders University
James Cook University
Murdoch University
University of CanberraCharles Darwin University
Queensland University of Technology
University of Tasmania
The University of Newcastle
Australian Catholic University
Macquarie University
Swinburne University of Technology
University of Wollongong
Edith Cowan University
Victoria University
The University of Notre Dame Australia0

Source: DESE Higher Education Finance Statistics (2021a).

Unlike VET subsidy programs, funding is not contestable between providers in the higher education sector.
While allocating funding based on historical arrangements provides certainty for governments and providers,
it can also limit competition. There is little incentive for higher education providers to innovate, improve their
quality (chapter 4), or differentiate their offering from others, and little opportunity for new providers to enter
the market. Block funding also prevents the sector from adjusting to changes in demographics or skill needs.
The impact of this lack of contestability is worsened when supply is capped at a level far below demand bothat the system-wide and provider level — as will likely be the case in coming years when the population ofschool leavers is expected to increase by about 15%. Accordingly, providers may be able to maintain theirstudent intake even if their teaching quality is mediocre. In this way, funding caps undermine the financial
incentive for high quality teaching. The floor to quality is only reached if TEQSA steps in or if the quality ofeducation is so low that some students opt out of higher education altogether.

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5-year Productivity Inquiry: From learning to growth Inquiry report

In contrast, in a system where the money follows the student, providers’ ability to receive this funding hinges on
their ability to attract students. Notwithstanding that many factors aside from teaching quality influence
students’ choices, removing caps on funding creates an incentive for providers to provide a high-quality
education. Indeed, inquiry participants attending the Productivity Commission’s roundtable on tertiary education
reported the previous demand-driven system created an impetus to focus on the quality of the student
experience, as students were more able to leave and go to an alternative provider if they were dissatisfied.
The extent to which a demand-driven system increases contestability is partly a function of which providers
can participate in it. Previously, it was only accessible to public universities.54 Other options are to include
not-for-profit universities, all universities, or all higher education providers. There may be some benefit fromthe position put by Independent Higher Education Australia that Commonwealth supported places should be
extended to all higher education students in national priority fields delivered by any TEQSA registeredprovider (IHEA, sub. 120, p. 5). The more expansive the scheme, the more contestability will increase,particularly if the smaller but more numerous and geographically dispersed non-university providers areincluded. However, a more expansive scheme will need to be weighed against the costs and risks ofincluding new types of providers.
Cross-subsidisation would be a concern if Commonwealth supported places are available at private
providers. It is difficult to reliably estimate course costs for universities, and costs vary significantly byuniversity (section 3.3). If other providers receive the same level of subsidy as universities, it is likely that thiswill exceed their costs — leading to subsidies going directly to profits and risking entry of unscrupulous
providers into the market. Accordingly, there are significant risks if subsidies are provided on the same basis
as they are currently, and it should not occur without measures to ensure they are appropriate given
potential differences in delivery costs. Even then, fiscal costs would likely rise as more students pursue
higher education, and further analysis is needed to determine if the students brought in by this change would
experience similarly positive outcomes to those brought in by the expansion of university places.

Caps on funding distort providers’ incentives
While the intent of recent university funding reforms was to encourage students to take courses linked to skill
needs and ‘national priorities’, the reforms had the unintended consequence of creating an incentive foruniversities to enrol students in some courses that the reforms intended to discourage, particularly at themargin.55 The government contribution was set with reference to priority skills. However, universities respondto the total funding level (including both the government contribution and student contribution).
Universities cannot receive more government funding than their MBGA, but different students contributedifferent amounts toward this cap based on the government subsidy for their course. This means that if auniversity has $30 000 left in its MBGA, the university could either offer a place to one agriculture student, orto 27 humanities, commerce or law students based on the regulated pricing structure. Accounting for the
student contribution, the former would result in about $31 000 in total revenue, yet the latter would result in
about $425 000 in revenue (based on 2022 rates) (Department of Education 2022c).
This creates a strong incentive for providers to channel students into the cheaper ‘chalk and talk’ subjects likecommerce, humanities, and law, and away from the more expensive fields such as agriculture, engineering,

54 Technically, Table A universities (Higher Education Support Act 2003 30-1(1)(a)(i)).
55 Each university’s block funding amount was based on the number of student places offered at the conclusion of the demand-

driven system. While this determines the maximum funding envelope, it does not specify any course or student mix. Thismeans that universities can choose which students to enrol, with funding provided based on the fee structure (the sum of thegovernment and student contribution) set by the Australian Government for each field of study (Ferguson 2021a).
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Investing for future skill needs

and science. This is a significant distortion that would prevent some students from studying courses to which
they are best suited, where they may be the most productive, and where skill needs are greatest.
This is exacerbated by universities’ ability to ‘over-enrol’ students — taking on more students than can becovered by their MBGA (although in doing this they must forego these students’ government contribution). Thiscan still be profitable if the student contribution alone is greater than the cost of supporting these additional
students, which will only be the case for select courses, such as the cheaper subjects mentioned above. For
the expensive and/or low student contribution courses such as engineering, nursing, or teaching,over-enrolment would likely have to come at great cost.
These perverse incentives could be ameliorated by reducing the drastic differentials in student contributions
established by the Job-Ready Graduates package (section 3.2), but this would not remove this issue entirely.
Even under a flat student contribution, when nearing a cap more students could be enrolled in cheaper courses
than more expensive courses, for a greater total amount received by the university.56 When exceeding a cap,
over-enrolment still could make financial sense for cheap courses.
Ultimately, perverse incentives result from any capped system and cannot be fully avoided without removing
the cap itself.57

The way forward
Given growing skill needs, the significant productivity benefits for marginal students, and the perverse
incentives and constraints on competition imposed by caps, the Australian Government should revert to ademand-driven system for university funding. Without such a system, many students — disproportionately
those facing disadvantage — who would have their lives enriched and be made more productive by higher
education will be denied this opportunity.
If fully demand-driven funding is not implemented, at the least, MBGAs should increase annually, with thegrowth rate adequately accounting for the cost associated with the growing population of school leavers.58
Although this would be an improvement on current arrangements, it would mean retaining existing pitfalls,
including inhibited competition and perverse provider incentives at the margins. This would sacrifice many ofthe benefits to productivity that could be achieved by a return to demand-driven funding.
Other recommendations in this volume will also need to be implemented to ensure a demand-driven
approach works effectively. In particular:• the costs of expanding access can be contained by increasing the proportion of course costs paid by
students (recommendation 8.5). Depending on the size of this increase, the transition to a demand-driven
system could be budget neutral

56 Assuming a flat $10 000 student contribution, a university with $30 000 left in its MBGA would be able to enrol 1.4 agriculture

students or 5.2 humanities, commerce, or law students. The former would result in $44 000 in total revenue, yet the latter would
result in $82 000 — a lesser distortion than under Job-Ready Graduates, but still a potentially damaging one.
57 That said, it is possible to cap the number of places rather than the quantum of funding. This would remove any
incentive issues resulting from cost differentials. However, this presents its own problems by creating significant budget
uncertainty — for example, the cost of supporting 10 000 places could be anywhere from $11 million to $272 million
depending on what students choose to study (based on current funding structures at 2022 rates).
58 Under current settings, MBGAs will grow by 1% for low-growth metropolitan, 2.5% for high-growth metropolitan and3.5% for regional universities (DESE 2021c). Even the highest of these growth rates may be insufficient to meet thedemand from the expanding school leaver population. And these growth rates will not be fully phased in until 2024.
Additionally, MBGAs are indexed using outdated forecasts of inflation, reducing the number of places that will be able tobe supplied. If a capped system is retained, this will need to be addressed (Norton 2022, p. 33-35).
63

5-year Productivity Inquiry: From learning to growth Inquiry report• prices should be based on the cost of delivery with estimates refined over time (recommendation 8.6)
• higher education will not be the most suitable pathway for all students. Providing access to VET
qualifications on a more equal basis — as well as being beneficial in its own right — will limit the
expansion of higher education coming at the expense of VET (recommendation 8.7)
• the quality of education for additional students under the previous demand-driven system was sufficient forthem to experience reasonable outcomes, and demand-driven funding improves incentives for quality
teaching. However, as the diversity of students grows and as the resources flowing into higher education
rise, there remains a strong need to improve quality and support completion (through therecommendations in chapter 4)• it will be of increased importance to ensure more school leavers possess the necessary foundational skills
to succeed in further study (through the recommendations in chapter 2).
Government funding alone is not sufficient for places to be supported in many courses. Inquiry participants
indicated that providers are constrained by a lack of placements for courses such as nursing and allied
health, which limits the number of places that can be offered (sub. 153, sub. 154, sub. 182, sub. 184). Where
placements are required for graduates to work in their field of study, governments should ensure anadequate number are available and funded to meet skill needs.59
There could be phased implementation of a demand-driven system if it appears that universities would expand
places rapidly before they can adjust resourcing to cater effectively to larger cohorts. This may not be necessary if
demand for university places is reduced by strong labour market conditions, as has been the case recently.

Recommendation 8.4
Grow access to higher education over time
The Australian Government should adopt an improved demand-driven model for providing Commonwealthsupported places to domestic undergraduate university students, subject to measures outlined in otherrecommendations that: contain fiscal costs (recommendation 8.5); and ensure all students are adequately
supported (recommendations 8.13 and 8.14).

3.2

Improving governments’ subsidy allocations

Governments use a range of inter-related controls to influence investment in tertiary education, which in turnaffects human capital and skills acquisition. Typically, governments:••••

set limits on the availability of subsidised student places (discussed above)
set maximum prices (course fees), or maximum loan amounts
subsidise course costs based on a determined government contribution and/or student contribution
offer student loan programs to improve education access and affordability

59 Another issue is medical places, which under the previous demand-driven system was the one course to have adesignated funding level. Expanded access to medical places may be warranted given the shortages of doctors in many
geographical areas and areas of practice. However, this would require further consultation.
64

Investing for future skill needs• offer other funding programs and incentives, for example to support capital investment or equity
group participation. 60
Governments’ investments in tertiary education aim to support equity of access and efficient skill acquisition
to meet labour market needs. However, the suite of subsidies, funding allocations and prices set bygovernments can undermine these goals (table 3.2).
Table 3.2 – Incentive problems affect the efficacy of government investment
Investment levers
SubsidysettingPricesetting

Incentive problem

Recommendation(s)• Subsidies set to encourage • Subsidies to influence student • Student contributions should be set
students into courses thatchoice are ineffective andmore equitably, based on privatealign with skill needs.

inequitable.

benefits. (section 3.2)

• Prices and loan caps set to • Provider incentives to enrol in • Improve estimation of costs of
incentivise efficient service

high margin courses, ratherdelivery, limit market power

than meeting labour market

and support fiscal

demand.

sustainability.

provision. (section 3.3)
• Using estimated costs, set annual
prices (and loan caps) to approximate
the median efficient cost of delivery.
(section 3.3)

Financing• Financing is available to• Policies may distort student• Loans should gradually be mademost higher education

choice based on financing

available to more VET students,

students, unlike VET

availability rather than wherestarting with expanding eligibility forstudents.

skill acquisition may be thecourses at a Diploma or above level.

most efficient or desirable.

(section 3.4)

Setting government subsidies
Governments have used various (and changing) subsidy models to influence student incentives (box 3.2).
The range of models used historically — coupled with the lack of consensus amongst stakeholders — calls
into question the approach that would best support efficient skill acquisition. The more recent model has
been a partial subsidy that differs by course type, combined with an income-contingent loan (ICL) available
to almost all higher education and some Diploma students. ICLs also have an implicit subsidy as many
students do not fully repay their loan (section 3.4).
The Productivity Commission proposes that subsidies be greater, on average, and set in line with the private
benefits of different degrees — with higher student contributions for high-earning degrees such as medicine.
Requiring a larger student contribution for high-earning degrees is both equitable (as those students receive
greater benefits, on average) and efficient (as it frees up more funding to expand access to higher
education). Income-contingent loans prevent any serious adverse consequences for an individual who
undertakes a high-earning degree but has poor outcomes.

60 Loan and subsidy arrangements vary across the sector. University undergraduate degrees receive a

Commonwealth supported place, and have the costs of their education subsidised by the Australian Government, withthe remainder of the cost deferred through an income-contingent, interest-free loan (HECS-HELP). University
students that do not receive a Commonwealth supported place — for example, those undertaking a master’s degree— are also often eligible for another income-contingent loan, FEE-HELP. Conversely, many VET students are noteligible for an income-contingent loan (section 3.4).
65

5-year Productivity Inquiry: From learning to growth Inquiry reportBox 3.2– Governments use different models for subsidy setting
Different principles have informed subsidy determination at different times. At the extreme ends of thespectrum, a student may be:• fee-for-service (full private cost) — the full cost is paid by the student. This is the case for students
who do not receive a government-funded place, including international students, some postgraduate
students, and non-university undergraduate students as well as students undertaking many VET
qualifications not on skill lists, or those not eligible for a subsidised place• fully funded (full public cost) — the full cost is incurred publicly, as occurred in 1974 when tuition
fees were abolished. However, demand pressures and a growing fiscal burden led to the introductionof fees through the Higher Education Contribution Scheme (HECS) (PC 2019b, p. 20). More recently,
some governments have offered ‘Free TAFE’ programs, but only for students at public providers — apolicy that undermines the viability and competitive role of private providers (PC 2020a, p. 97).
However, most courses have some combination of a subsidy and private contribution (either an up-front
fee or a loan). To determine how large each contribution should be, governments usually consider:• private benefits — there are significant private benefits to tertiary attainment (chapter 1).
• public benefits — in principle, without subsidies that reflect the social benefit of education, there
could be underinvestment as individuals only account for the private costs and benefits of study.
• skills shortages or labour market needs — all governments use skill lists to differentially allocate
subsidies, with higher subsidies applied for apprenticeships in particular. The Australian Government’s
Job-Ready Graduates package also revised subsidies to encourage demand for courses deemed tomeet skill needs.

Governments fund courses based on public benefits and skill needs …
Subsidy setting policies across VET and higher education aim to encourage uptake of training that is sociallydesirable or in demand in the labour market — primarily through higher subsidy rates for select courses. In
VET, governments subsidise qualifications with differential rates depending on whether the qualification is adeemed priority (PC 2020a, p. 256).61 In higher education, the 2020 Job-Ready Graduates package also
altered government subsidies to better align with ‘industry and community priority’ (box 3.3).

61 Jurisdictions usually use a combination of quantitative and qualitative labour market analysis (including industry

forecasts, mapping qualifications to occupations, industry consultation and labour market testing) to make a judgementon the qualifications demanded in the labour market, and therefore, the extent of subsidy. Typically, governments target
subsidies to the areas deemed to have high returns, either to the public (such as foundation skills courses) or to theindividual (such as apprenticeships). Subsidies can also differ depending on whether a student studies at a public or
private provider, the level of the qualification, and the mode of study (e.g. apprenticeships). However, there is limited
transparency regarding how these criteria influence subsidy setting.
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Investing for future skill needs

Box 3.3 – How did Job-Ready Graduates alter subsidies for university courses?

The 2020 Job-Ready Graduates package (JRG) altered the student and government contribution tocourses in different fields of study. Subsidies were increased for certain fields deemed to produce more‘job-ready’ graduates and decreased for fields where graduates were deemed less employable. Thesechanges were partly aimed at improving matching of students to skill needs and therefore, productivity:… encouraging study in fields most necessary for the jobs of the future and positioning
Australia to capitalise on opportunities to increase productivity and national prosperity in thedecades ahead. (DESE 2020, p. 23)
The objective was to direct funding ‘ … to areas of expected employment growth, as well as industry andcommunity priority’, by encouraging students to make more job-relevant choices (Tehan 2020). However,there is little public information about how the choices of fields receiving more (or less) in subsidies were
made. For example, JRG encouraged students to take up the study of some fields, such as English andForeign Languages, with some of the lowest estimated public and private benefits. Conversely the four
fields with the highest estimated public and private benefits had their student contributions either remainsimilar or increase significantly (DESE 2020 pp. 17–20).
The package also changed Commonwealth Grant Scheme payments to universities. Previously,
universities received less than the cost of delivery for some courses and significantly more for others(DESE 2020, p. 21).
The overall outcome was that total resourcing for each degree was changed, comprising changes to boththe student contribution and the government contribution.
Job-Ready Graduates made large changes to prices and subsidies for some coursesa
35,000Student contribution

Commonwealth contribution

30,00025,000$20,00015,00010,0005,000

0Pre-JRG

Post-JRG

Humanities

Pre-JRG

Post-JRG

Pre-JRG

Commerce

Post-JRG

Nursing

Pre-JRG

Post-JRG

Engineeringa. Initial changes. Amounts will vary over time due to CPI indexation.
Sources: DESE (2020); Ferguson (2020a); Tehan (2020).

67

5-year Productivity Inquiry: From learning to growth Inquiry report… but these rationales are flawed, particularly given income-contingent loans
While economically intuitive, the case for differential subsidies to encourage uptake of courses — in areas oflabour market need or social priority — is flawed for three key reasons.

The public benefits of different courses are difficult to estimate
While there is strong evidence that public benefits exist, this does not extend to using them as a basis fordetermining subsidies.62 This is because changes to subsidies do little to induce student demand above
counterfactual levels (‘additionality’) when students have high private benefits for choosing to study and will
likely do so irrespective of the size of the subsidy. Norton (2017) for example, warned against using publicbenefits to estimate subsidies, noting that:… the presence of public benefits does not of itself lead to sub-optimal levels of education. This
will only happen if the total net private benefits are too low to justify enrolment. In those cases,
tuition subsidies reduce costs and make it easier to get to positive net private benefits. … Even
though market failures are possible, with income contingent loans there are only limited
empirical circumstances in which they actually exist.
As well as concerns regarding additionality, attributing public benefits by level of education is not clear cut.
While tax benefits are likely to be larger for higher education qualifications, other social benefits, like reduced
crime or addressing intergenerational disadvantage, are likely to be higher for Certificate I and II
qualifications (PC 2020a, p. 112). Moreover, attributing public benefits by field of study is even more
problematic — either requiring normative judgements about what professions are socially beneficial, orconceptually weak assumptions about the economic contribution of different sectors.
Similarly, there are significant limitations in the methods used to estimate skill needs (box 3.4). There is little
evidence that differential subsidies effectively address skills shortages, particularly as some occupations
have remained in persistent shortage for over a decade, irrespective of subsidy settings (PC 2020a, p. 113).
A range of jobs, including hairdressers, arborists and panel beaters, have been deemed in persistent
shortage for most years in the decade to 2018 despite subsidised courses on offer (PC 2020a, p. 329).

Box 3.4 – Skills shortages are a poor basis for setting subsidies
Governments set subsidies and available places to favour courses relevant to skills that are, or are
predicted to be, in short supply. In VET, all State and Territory governments use skill lists to determine
the courses eligible for subsidies, with the subsidy rate based on deemed skill shortages. Similarly,
government subsidies for university courses vary by field of study depending on estimated employment
prospects (box 3.3). This reduces the relative price of courses in these fields, encouraging enrolment.

62 While there is a consensus on the existence of public benefits of education, estimates of their magnitude — andtherefore implications for subsidy setting — are more complex and long debated. Previous reviews have taken different
perspectives on how subsidies should be set, from the Wran report (Committee on Higher Education Funding 1988)
which established the design of the HECS system, to the more recent Bradley review (2008), Lomax-Smith review(2011), and Kemp-Norton review (Norton and Kemp 2014). Work by the Grattan Institute (Norton 2012) and Deloitte(Deloitte Access Economics 2016) — while proposing novel methods to estimate the public benefits of tertiary education— do not provide robust methods to inform subsidy determination.
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Investing for future skill needs

Box 3.4 – Skills shortages are a poor basis for setting subsidies
However (apparent) skills shortages are a poor basis for setting subsidies both theoretically andmethodologically.
• Subsidy differentials have little effect on behaviour (for reasons discussed further below).
• Market sector areas with genuine skills shortages elicit rising wages. Forward-looking students
therefore already have incentives to study courses with strong employment and wage prospects.
Course subsidies can therefore act as an ineffective and potentially inequitable transfer to people withgood long-term prospects.
• The delay between training and working in the profession may be significant, such that the ‘shortage’
may have disappeared before a student graduates. Migration is likely a faster and more efficientmechanism for addressing skills shortages.
• To the extent that subsidies change behaviour at the margin, this may still be undesirable as itpresupposes that students cannot make good choices themselves (discussed below).
There are also significant concerns about the methodology, currency, and underpinning conceptual
framework of skills lists that suggest they are a poor basis for allocating subsidies (PC 2020a, p. 116).
Skills lists are broad in nature and may not accurately reflect local skill needs (CCF, sub. 38, p. 5). For
universities, which are less vocational in orientation, there are more fluid and ambiguous links between
future jobs and the fields of study that might be relevant. For example, digital technologies like gaming
require graphic designers and artists as much as software programmers.63

Students are unlikely to respond to price differences
The overall demand for university enrolment in Australia is unresponsive even to significant price increases
given ICLs and existing subsidies (Dawkins and Dixon 2015, p. 3).64 This also appears to hold for the VET
system (PC 2020a, p. 282). Students’ price insensitivity can be rational given the experiences, careers, andearnings resulting from a given field of study differ substantially, and compared with this, fee differences will
have a far smaller impact on a student’s life.
The income-contingent and interest-free nature of Australian student loans mean that higher fees only affecta student’s finances at the date when they would have otherwise paid off their debt. For example, underchanges made as part of the Job-Ready Graduates package, the student contribution for a humanities
degree in 2021 doubled from $6803 to $14 500 per year. While this was a major change in price, its effect on
additional loan repayments by the median humanities student with an ICL would only occur between ages
33 and 40 years, or some 15 years into the future (Chapman and Khemka 2022, p. 57). Indeed, early
evidence of applications suggested little change, even in courses with large fee increases (Norton 2021).

63 Inquiry participants have similarly raised concerns about Australia’s (similarly-derived) skilled occupation list for

migration — discussed in this inquiry’s companion volume ‘A more productive labour market’.
64 A global meta-analysis of the responsiveness of enrolments to university tuition fees found price elasticities of close tozero, although the policy settings across countries are different (Havranek, Irsova and Zeynalova 2018).
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5-year Productivity Inquiry: From learning to growth Inquiry report

This implies that, in the context of ICLs, very large changes to course subsidies would be needed to induce
material increases in overall tertiary enrolments.65
There is less evidence on the extent to which varying subsidies by field or course affects the choices ofstudents who have already decided to attend a tertiary institution. However, early evidence from JRG
suggests the effects for individual university courses are low due to the same moderating effect of HELP
loans. This was borne out by a study which measured student responsiveness to price changes, treating the
Job-Ready Graduates package changes as a natural experiment. This found that reducing a course fee by
10% would result in a trivial 0.4% increase in demand (Yong 2022a, p. 23).66
Moreover, choices for specific tertiary education courses often reflect students’ underlying interests and aptitudes,
as well as factors like the courses’ perceived quality, and how and where they are delivered (Brown 2017).
Offering greater subsidies for a course of little interest to a student will not elicit a change in demand.

Students make good choices
Students appear to make good choices of their own volition. They have the best information about their own
abilities and interests, making them well placed to make decisions about what they will enjoy — and benefit
from — studying. During the Victorian Training Guarantee — which gave students a reasonably free choice
in what to study — this ‘improved the alignment of course enrolments with measures of prevailing skill needs,
including enrolments of disadvantaged groups’ (Polidano, van de Ven and Voitchovsky 2021, p. 1).
Policies that limit students’ choices may lead some into training that does not align with their interests, which
may be harmful to their careers in the long term. Some international evidence points to the benefits ofstudents studying in line with preferences given that a student’s comparative advantage is highly relevant totheir labour market outcomes. For example, a Norwegian study examined students who were just above andbelow the admission score for a course in their preferred field, finding that their earnings usually increased
when they were admitted to their first choice of course, even if it led them to study in a course with lower
average earnings (Kirkeboen, Leuven and Mogstad 2016).67
As such, it is important that financial incentives are broad and not limited to particular sectors, industries orskills, to support education that is best suited to each individual as well as the needs of the economy.

65 Students are more responsive to subsidies where loans are not available. Evidence from the entitlement scheme

implemented in Victoria points to significant VET uptake where there were few restrictions on course selection or caps on
places (Polidano, van de Ven and Voitchovsky 2017, 2021). This program removed the significant financial barriers
posed by limited loan availability, restrictions on government-funded places and large out-of-pocket costs associated with
fee-for-service enrolments. The demand response was also particularly strong from disadvantaged groups, such as thelong-term unemployed, for whom affordability is a greater concern.
66
If anything, this is likely to overestimate student responsiveness. A necessary assumption (acknowledged by theauthor) is that nothing changed between cohorts enrolling in 2019 and 2020. Of course, this is not the case. COVID-19
likely affected student choice in many ways, in particular seeming to increase interest in health courses, with a spike innursing applications. This may have upwardly biased the estimated response to the lower fee for nursing.
67 For students whose first choice was science and second choice was social science, studying science increased theirearly-career earnings by $70 000 USD. For students whose first choice was social science and second choice wasscience, studying social science rather than science increased early-career earnings by $56 000 USD (Kirkeboen,
Leuven and Mogstad 2016, p. 1091).
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Investing for future skill needs

Options for improving subsidy allocation‘Free’ tertiary places carry a fiscal cost and are unlikely to improve outcomes
Australia has required student contributions for tertiary education since the 1980s, when free tertiary
education was gradually replaced by the current system of ICLs through HECS and HELP. This shiftreflected concerns about the mounting taxpayer costs of fully subsidising a rapidly expanding system(PC 2019, p. 20). Moreover, it was recognised that free university involved a large transfer from all taxpayers
to a predominantly socio-economically advantaged group with better career prospects. Put simply, freeeducation transfers costs from those who study to those who do not. It is preferrable to recover this costmore directly from those who benefit. As one commentator remarked, ‘it is not equitable for the average
taxpayer to pay for trust-fund students’ law degrees’ (Yong 2022b).
A similar logic applies today. To offer free or cheaper courses, the Australian Government would have two
options, neither of which meet sound equity or efficiency criteria. It could cut places to accommodate thehigher costs, which would favour students with higher Australian Tertiary Admission rankings (ATARs) as
this is the principal mechanism for rationing places. This would disadvantage students from lower
socio-economic backgrounds who tend to have lower ATARs (Manny 2020) and would involve larger
transfers from taxpayers to students with high expected lifetime earnings. Alternatively, the AustralianGovernment could meet the costs of free university by raising taxes (which tends to discourage
economy-wide labour supply and investment) or by cutting other government spending.
Free TAFE policies are also unlikely to provide community-wide benefits as suggested by the outcomes ofthis policy in Victoria (PC 2020a, pp. 94–97).
• Although enrolments increased at TAFEs, this probably reflected substitution from students who would
have otherwise studied at private and community providers. For example, there were fewer enrolments inthe Diploma of Nursing at non-TAFE providers, against the trend of previous years. Some private
providers claimed that many students were feeling a financial pressure to study at TAFE.
• It weakened competition as the market share of TAFEs increased at the expense of private andcommunity providers, diverging from the national trend. In some courses, TAFEs increased their alreadydominant market share, raising the concern that this limited contestability by other providers.
There is also no evidence that the quality of delivery is higher at public than private providers (PC 2020a,
pp. 102–103). Students are equally satisfied with public and private RTOs, while employer satisfaction ishigher for private RTOs. Therefore, free TAFE is not a means to increase quality of outcomes.68
In that context, the additional cost of funding free TAFE would be better spent elsewhere, potentially on
widening access to VET, other forms of skills acquisition or other ways of improving the education system.
Mass loan forgiveness of HELP (as well as VET Student Loans and remnant VET FEE-HELP) debt issometimes seen as a desirable approach to alleviate financial costs on young people with large outstanding
debts. As such a policy relates to already completed education, it could not enhance skills, and would be apurely redistributive measure. As in the case of free education, it would be regressive, benefiting those whohave attended university and tend to have higher incomes, with the largest payments going to those whohave completed courses with higher expected lifetime earnings, such as medicine, law, and engineering(DESE 2021b). At June 2022, the fair value of this debt was about $50 billion.69 For the same cost as

68 Other levers are better deployed if quality is the major problem, for example in the first instance identifying poor

performers and attempting to rectify their quality issues, regardless of ownership status.
69 The ‘fair’ value of HELP debt reflects that a share of students will never pay off their debt.
71

5-year Productivity Inquiry: From learning to growth Inquiry reportcancelling all student debt, the Australian Government could give about $5100 to every household(AIHW 2022; Commonwealth of Australia 2022b; Ferguson 2021b).
Nevertheless, there may be merit in free or heavily subsidised Certificate I and II courses given their large
public benefits from developing foundational skills and the relatively low lifetime incomes of students. Debt
forgiveness is also appropriate in some circumstances, for example where a student has undertaken afraudulent course, as was frequently the case throughout the life of VET FEE-HELP. Indeed, many loans
under that scheme have been forgiven (Commonwealth Ombudsman 2020).

Instead, subsidy rates should be changed to reduce the fiscal cost of additional
placesThe low responsiveness of students to course fees, particularly in the context of ICLs, suggests lower
subsidy rates — and therefore higher student contributions — would have only negligible effects on demand
for tertiary education. For a given funding envelope, higher student contributions allow a greater number ofplaces to be supported. Therefore, in the presence of fiscal constraints, fee increases promote, rather thandetract from, expanded access to education.
Additionally, as discussed above, it is also more equitable for students to incur a higher proportion of the costof their education. Students receive substantial private benefits from tertiary education. They
disproportionately come from socio-economically advantaged families and have good career prospects. And
student contributions reduce the proportion of higher education that is funded through the general tax base.70
Students are also protected if their education does not pay off. If they go on to earn only a low income, they
may not repay all or even part of their loan.
This does not extend to VET. Under existing policies, the majority of VET students are not eligible for ICLs
and providers are not subject to price caps (section 3.4). Any future recalibration of subsidies for VET totransfer more of the costs to those that benefit should only occur if ICL access is significantly expanded; andshould be mindful of interactions with loan caps. Otherwise, there is a risk of undermining access to VET by
imposing larger upfront fees. The Productivity Commission previously proposed methods to simplify subsidy
setting in the VET sector, in place of the highly granular rates used in some jurisdictions (PC 2020a, p. 285).
These recommendations remain relevant.

The student contribution should be set based on private benefits, withremaining course costs paid by government
Although the average level of the student contribution (and therefore the average subsidy level) is theprimary determinant of the affordability of the system, how student contributions vary by field of study also
affects the equity of funding arrangements and the share of debt that is expected to be repaid.
There are several options for subsidy setting. The simplest is a uniform subsidy for all courses, which could beeither the same dollar value or the same share of costs. While price insensitivity means students would be unlikely
to have their choices distorted by differences in course costs, this would still arbitrarily burden some students with
far more debt than others, given differences in course costs by field of study (section 3.3). A higher proportion ofdebt would not be repaid, and the costs of higher education would be less equitably shared.
A superior model is to vary fees by private benefits, with students studying fields with higher expected earnings
paying higher student contributions. Unlike the public benefits of tertiary education, which are difficult to quantify,
information on the lifetime income profiles of students provides reasonable estimates of the private benefits of

70 Including, for example Goods and Services Tax (GST) which is paid by all consumers, including those on low incomes.

72Investing for future skill needs

tertiary education (although these will not capture any non-financial private benefits). Employment rates andlifetime incomes are increased by greater levels of education — particularly from university (chapter 1). The highlifetime earnings of higher education graduates for certain fields suggests that many receive large government
subsidies despite significant private benefits and strong incentives to attend (figure 3.4).
However, private returns are not high across all fields of study and there is significant variation in average
incomes even nine years after completing study.
These benefits are not strongly related to the prices paid by students. In higher education, engineering,
dentistry, and medicine students pay only moderate student contributions despite having the highest
graduate earnings. And students in some of the lowest-paid fields of study pay the highest possible
student contribution — even though the mismatch between their fees and their earnings means much ofthis debt may never be repaid. Better aligning student contributions with private benefits would create amore progressive system.
Figure 3.4 – The private benefits of education vary by field of studya
Average earnings 9 years after university graduation, for those graduating in 2008

Field of study

Creative Arts
Humanities, Culture and Social Sciences
Communications
Social Work
Tourism, Hospitality, Personal Services and Sport
Psychology
Agriculture and Environmental Studies
Science and Mathematics
Health Services and Support
Veterinary Science
Rehabilitation
Architecture and Built Environment
Average overall
Teacher Education
Business and Management
NursingPharmacy
Computing and Information Systems
Law and Paralegal Studies
Engineering
Dentistry
Medicine
0

25th percentile

40,00080,000120,000
160,000
Average earnings 9 years after graduation ($AUD)
Median75th percentile

a. This provides only a weak proxy for earnings benefits, as it is difficult to attribute the earnings differentials directly to
education. This chart contains data for those who graduated in 2008, and reflects their average income 9 years after
graduation, in 2017-18.
Source: SRC (2021).

73

5-year Productivity Inquiry: From learning to growth Inquiry reportThree issues must be considered when setting higher student contributions for courses with higher private
benefits. First, private benefits to education are not always financial and other factors — such as morefavourable working conditions — cannot readily be quantified. This means that earnings are only a proxy for
private benefits.
Second, some fields with comparatively low incomes — such as nursing and teaching — have wages thatare heavily regulated and controlled by governments. To the extent that the real problem is excessive wage
bargaining power by governments, the solution would be to set wages that would be offered in a morecompetitive labour market rather than to provide higher course subsidies. Of course, from a government
fiscal perspective, payments to students that target new enrolments into the profession will cost less.71
Finally, ICLs already provide additional subsidies for students undertaking courses with lower lifetime
incomes. This is because they reach the income threshold for repayment later (or never) and, as such, payback a smaller share of their loan than other students. This provides additional grounds for extending ICLs to
more qualifications in the VET sector (section 3.4).

The way forward
Currently, differences in student contributions by perceived labour market needs fail to meet their goals while
arbitrarily increasing debt burdens on some students, and high levels of government subsidies challenge thesustainability of expanding access to higher education. To remedy this, the variation in student contributions
should be lower and based on expected future earnings by field of study, while the level of student
contributions should be higher, on average.
• This would mean a greater proportion of the costs of higher education will come from higher-earning
students who will be less affected by repayments.72• Increasing the average student contribution would also support more fiscally sustainable demand-driven
funding (recommendation 8.4). Depending on the magnitude of the increases, this could be budget-neutral.
The Australian Government should leverage the Australian Universities Accord process to consult the sector
on this funding model. Given the design flaws of the Job-Ready Graduates package outlined above, thepanel leading the Accord should progress this new funding model as a priority.
Student contribution arrangements should be grandfathered for students who have already commenced theirstudy. Depending on the extent of changes in student contributions for particular fields of study, theAustralian Government could consider phasing in new arrangements over a number of years.
Finally, while ICLs do not incur interest, they are indexed to inflation. This can mean that loans grow morethan graduates’ incomes during periods of low wage growth and high inflation (as has been the caserecently). If student contributions are to increase, as a further protective measure, the AustralianGovernment could amend loan indexation to move in line with the lesser of inflation and real wages growth.

71 Governments should be cautious in attempting to encourage students into particular fields of study. However, anyefforts to promote study in certain areas would be more effective and efficient when involving cash payments to students,
as proposed in the National Teacher Workforce Action Plan, rather than reducing course fees as with Job-Ready
Graduates (Department of Education 2022a, p. 9).
72 Better matching student contributions to lifetime earnings would have a further benefit of reducing the share of debt
that is not expected to be repaid.
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Investing for future skill needs

Recommendation 8.5
Better targeting investment in higher education
The Australian Government should introduce a new university funding model to better target investment
while facilitating wider access to higher education.
• Total university funding per student by field of study (comprising the student contribution andgovernment contribution) should continue to be the cost of delivery for that field (reflecting a medianestimate of efficient costs with the methodology to be refined over time as outlined inrecommendation 8.6).
• The student contribution should be set based on average expected earnings for each field of study, withstudents with a greater capacity to repay incurring more debt. Student contributions should be higher,
on average, to recoup a greater share of the costs of university from those who benefit from attending
university, rather than recouping this from the broader tax base. This would also help to fund the return
to a demand-driven system.
• The government contribution should make up the gap between the student contribution and estimatedcost of delivery for each field of study.

3.3

Setting prices based on efficient costs

Poor price setting leads to poor provider incentives
Governments use price and loan caps to influence how funding is used within tertiary education. Unlike
students, education providers are responsive to prices, which are set by governments for undergraduate
degrees and for some parts of VET.73 In instances where fees are not government regulated (such as for
VET courses in most States and Territories), subsidy rates are applied to an estimated cost of delivery for aparticular qualification — a form of ‘price’ (NSC 2021b).74
Governments use estimates of the ‘efficient’ cost of delivery to set price caps, loan caps, and to calculate thebase cost to which subsidy rates are applied.75 Poor price setting can have major adverse impacts.
• Prices set below efficient cost may compromise the quality of courses offered, or — in the case of loancaps on VET courses — result in significant out-of-pocket costs for students by increasing upfront fees. As
a result, other regulatory tools and provider performance indicators are important complements to ensure
providers are not reducing service quality in the context of regulated prices.
• Prices set above efficient cost may undermine incentives to operate efficiently, reducing productivity.
Price caps set higher than the efficient cost may not deter students from enrolling in the context of
73 The ‘price’ of a course is the amount that a provider charges for education and training services. For government-

funded courses, the price paid to a provider has two parts: a subsidy (paid by the government, also known as thegovernment contribution) and a student fee (paid by the student or an employer, known as the student contribution).
74 Where prices are not regulated, loan caps are also often used by governments as de facto price regulation to reduce
the risk of unduly high prices, although providers can charge more than the loan cap, resulting in up-front fees.
75 In a perfectly competitive market, the efficient price is the marginal cost incurred by the producer, or the cost ofteaching the next student. This will of course differ based on the current number of students and the resources involved(staff, rooms, equipment, digital technology) — the cost of teaching the first student will almost certainly be higher thanthe cost of teaching the twentieth.
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5-year Productivity Inquiry: From learning to growth Inquiry report

income-contingent loans, but would result in increased debt burdens and additional costs for theAustralian Government associated with greater subsidies and non-repayment on the larger total debt.
Prices set below efficient cost in some courses and above in others pose further issues. Providers will have afinancial incentive to encourage students into, and expand places in, courses for which they will receive asurplus, in favour of those where prices do not fully cover costs. For example, it has been argued that thecost estimates used to determine university funding overestimate the costs of commerce, humanities and law
courses while underestimating the costs of science and engineering courses (Dodd 2020). If this is correct,
this poses a significant risk to productivity by compounding financial incentives to channel students into fields
that are mismatched to skill needs.
No pricing model is straightforward in practice.
Ideally, prices would be set at the minimum cost of teaching each additional student at the desired level ofservice quality. However, this ideal is challenging to achieve in practice. ‘Marginal’ costs will differ fordifferent students and providers, the quality of education is difficult to accurately measure, and the link
between specific costs and outcomes is not always clear.
Average cost pricing (that is, the average cost across all providers) may be easier to implement but has its
own shortcomings. Marginal costs are likely to be lower than average costs, which means that offering moreplaces leads to a surplus that can cross-subsidise other activities (such as research). Furthermore, thedifference between marginal and average costs will vary by field of study (depending on the mix of fixed andvariable costs). This creates an incentive to enrol more students in courses where the difference is greater —and fewer where it is smaller, such as science, engineering, and medical fields where the need forequipment, practicals, or placements means there will always be significant costs to enrolling more students.
Estimating ‘efficient’ costs introduces further difficulties despite its strong appeal as an incentive mechanism
for providers. There are very wide differences in the estimated costs of delivery by different universities, only
some of which will reflect differences in efficiency (figure 3.5). In this context, an average cost derived from
historical expenditure provides a practical benchmark for moving toward efficient pricing, although historicalcosts may deviate from the theoretical ‘efficient’ cost. Median (rather than mean) costs, as are currently
used, can limit the impact of some providers having unusually cheap or expensive courses.

76Investing for future skill needs

Figure 3.5 – Costs of course delivery vary substantially by institutiona
Distribution of estimated costs per student (EFTSL) by field of study in 2020b
70,00060,000

Cost ($)

50,00040,00030,00020,00010,0000a. The boxes represent the universities with costs between the first and third quartiles, with the colour change marking themedian cost institution. The ‘whiskers’ show the institution with the highest and lowest cost. For some fields of study, data
are available for 37 institutions, for others there are as few as six. Three outliers were not included in the graph: a Mixed
Field course costing $67 994, an Environmental Studies course costing $60 494, and an Agriculture course costing$93 831. Each was more than 50% higher than the next most costly course. b. EFTSL is equivalent full-time student load.
Source: Deloitte Access Economics (2022).

Cost data can (still) be improved
The Productivity Commission has previously highlighted the importance of cost-reflective resourcing for
Commonwealth supported places in universities (PC 2017c, p. 2). Since then, the Australian Government
revised the maximum price in line with estimated costs of delivery as part of the Job-Ready Graduatesfunding reforms. This major change — the first to explicitly separate the costs of teaching and research —was a crucial step toward cost-reflective resourcing for universities (box 3.5). The Australian Government
also increased the frequency of an exercise to collect data on the costs of teaching at universities, known as
the Transparency in Higher Education Expenditure (Deloitte Access Economics 2022).76
Similarly in VET, the Australian Government introduced reforms to provide a national evidence base to
estimate the costs of delivering VET qualifications, coordinated through the National Skills Commission(NSC) (now replaced by Jobs and Skills Australia) (Ferguson 2020b). A core part of the NSC’s functions
involved collecting better data on the cost of delivering qualifications, given significant variability in the

76 This initiative establishes common cost allocation methods to estimate the cost of delivering different qualifications.

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5-year Productivity Inquiry: From learning to growth Inquiry report

methods used across jurisdictions, which often rely on poor or outdated data (PC 2020a, p. 279). This
information could then inform State and Territory governments’ VET subsidy determinations. This process
should be continued, and is likely to be best placed within the remit of Jobs and Skills Australia.

Box 3.5 – Breaking the nexus? Separating research and teaching costs
A key change from the Australian Government’s 2020 reforms to university funding was the explicit
separation of teaching and research funding, and the alignment of funding to the costs of teaching:
Better aligning funding with the cost of teaching will fix distortions in the funding system andensure universities can respond to student preferences … (DESE 2020, p. 14)
However, many stakeholders from the university sector claimed the importance of the research-teachingnexus (NTEU, sub. 36, p. 7), stating that these core activities were not separable from a funding
perspective. There is limited evidence to support this claim (chapter 4). Rather, as the Productivity
Commission previously noted (PC 2017c, p. 41):
… various empirical studies in Australia and elsewhere have found little evidence to support a
positive relationship between teaching outcomes and research capabilities … [e]vidence thatfinds no reliable link between research and teaching quality does not mean that universities
should forgo trying to nurture a link, however. If a university can succeed in raising teachingquality through synergies with research, then it increases its attractiveness to students …
A key benefit of separating research and teaching costs for funding is that it provides a better basis forestablishing the actual cost of each activity, where prior evidence points to ongoing cross-subsidies(Norton and Cherastidtham 2015). Moreover, separating research and teaching for funding purposes canimprove comparability across tertiary institutions, as VET and non-university higher education providers
do not typically hold research functions.

While these developments improve the transparency and reliability of data on the costs of delivering tertiary
education, further analysis would be beneficial, including:• better cost allocation methods — there may be an opportunity to improve the robustness andcomparability of future cost exercises by including greater granularity of cost attribution (for example,
allocating costs between undergraduate and postgraduate education within faculties) and using more
realistic assumptions about allocation of staff time. There may also be scope to better account for thecosts of scholarship, capital, and research (Higher Education and Research Group 2020; Massaro 2020)• greater breadth of collection — the most recent exercise has expanded to include all Table A public
universities (Deloitte Access Economics 2022).77 Extending a comparable exercise to a broader sample of
VET providers would also improve accuracy of cost estimates and scope for benchmarking efficient costs.
This could take place as part of a consolidated costing exercise across sectors through a central function
within government, such as Jobs and Skills Australia

77 Although, current funding levels are based on the previous costing exercise which included only 32 out of 37 Table A

public universities.
78

Investing for future skill needs• a linked cost exercise for research activity — despite previous government commitments, data on thecost of delivering research is deficient.78 A cost exercise for research is essential to improving costestimates of both research and teaching and for providing a basis to understand appropriate funding
levels for research. Overseas examples suggest this is feasible, as in the UK’s Transparent Approach to
Costing, which covers research and teaching costs.79 It is also necessary to consider research costs when
adjusting funding for teaching, given many institutions currently rely on cross-subsidies from teaching tocover indirect costs of research• introducing greater benchmarking over time — using historical cost data for regulated prices cancreate an incentive for providers to inflate costs over time to increase revenue (‘gold-plating’). In thiscontext, benchmarking the cost of provision between providers in Australia and overseas is an importantsafeguard (Houghton, Bagranoff and Jubb 2021). Benchmarking can be also inform an understanding of‘efficient’ costs when services vary substantially between institutions.
Governments have implemented policies that lay the foundations for reliable cost estimation exercises inrecent years, but the adjustments described above would improve current arrangements. Costing exercises
need to consider the biases that can occur if they do not adequately capture variations in quality. Failing toadjust for quality could undermine the funding of productivity-enhancing, but more costly services. Whileuseful for price setting, cost exercises are only one aspect of understanding provider performance and thesector more broadly (as explored in detail in chapter 4).
Given the significance of cost estimation for funding decisions — and that misestimation can pose a risk toquality or distort providers’ incentives — it is essential to cultivate greater confidence in tertiary education
cost data. Depending on the accuracy of current figures, improvements could remove an impediment to theefficient matching of student to courses, improving education and labour market outcomes.

Recommendation 8.6
Improve price setting in tertiary education
The Australian Government should conduct regular costing exercises to estimate the cost of delivering
tertiary teaching and research. The methodology underpinning these cost exercises should be periodicallyreviewed and refined to inform more accurate cost estimates, and should aim to ultimately reflect only
efficient costs. These cost estimates should inform funding as well as price and loan caps, to encourage
efficient delivery of quality education and research by tertiary institutions.

78 The ABS conducts the Higher Education Expenditure on R&D (HERD) Survey every two years. However, expenditureis reported in high-level categories and is not reported on an institutional basis.
79
The United Kingdom Government’s Transparent Approach to Costing focuses on the share of total costs that are
incurred by teaching, research, and other activities. It provides an example of the simultaneous measurement of teaching
and research costs, and allows for analysis of drivers of costs, although it does not attempt to estimate the costs ofdelivery for different courses (Office for Students 2018). In the United States, the Higher Education Research andDevelopment (HERD) Survey collects information on research costs at 910 (as at January 2023) universities andcolleges, providing extensive information on cost components and how they change over time (NSF 2020). The
University of Delaware also collects annual data on university teaching costs across multiple disciplines at nearly 700
institutions (Hemelt et al. 2018; University of Delaware 2022).
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5-year Productivity Inquiry: From learning to growth Inquiry report

3.4 Harmonising loan settings to increase access totertiary education
Financial barriers prevent some Australians from pursuing education (figure 3.6). About 7% of Australians aged
20-54 years who did not participate in formal study in the past year wanted to, but could not, with one third ofthem listing financial barriers as a reason (ABS 2022g). About 60% of those who listed financial barriers wanted
to enrol in a qualification below the bachelor level, suggesting financial barriers are greater for VET.
Time constraints alone limit students’ capacity to fund their study by working, yet many do not have accessto enough savings to fund study. ICLs are generally available for higher education and overcome the barrierof upfront tuition costs. However, such loans are highly restricted for VET students.
Figure 3.6 – Financial barriers prevent many people from formal studya
Reasons those who wanted to engage in formal study could not
50
45

Proportion (%)

40
35
30
25
20

15
10

5
0
Too much work / no time
15–19

Financial reasons
20–24

25–34

Personal reasons
35–44

45–54

Courses not available

55–64

a. Multiple options could be selected. This survey was undertaken during COVID-19, and there was an unusually highproportion of respondents choosing ‘Other’ reasons why they could not access study. This has been omitted in this chart.
The respondents include those wanting to enrol in a higher education qualification, although barriers were more likely for
those wishing to undertake vocational education or training.
Source: ABS (Work-Related Training and Adult Learning, Australia, 2020-21 financial year, Cat. no. 4234.0, table 14).

This is problematic as vocational education is a reliable path to employment in many areas at risk of skill
shortage or with high projected employment growth, from the trades to aged care. The former NSC projectedthat while 53% of newly created jobs over the next five years will require higher education, 39% will require
vocational education (NSC 2022a). Ensuring access to VET for students at initial career stages and for thoseupskilling and reskilling is important. For many students, VET is their best chance at a fulfilling andproductive career, whether due to their strengths, their interests, or their desired career path.

Income-contingent loans are an effective tool to reduce course
costs, but current policy settings create distortions
ICLs provide students with credit to pay course fees. They differ from conventional ‘mortgage-style’ loans inthat repayments are deferred until the borrower earns more than a set threshold. Repayments are calculated
80Investing for future skill needs

as a percentage of income above this threshold and on a sliding scale. ICLs allow students who could nototherwise afford to pay course fees to defer payment to a time when they have higher incomes. ICLs havebeen successful in higher education, but their rationale applies equally to VET, where their use is highly
limited. The VET Student Loans (VSL) program is available for only some courses at Diploma level andabove. In 2019, only 277 of 635 Diploma courses were eligible for VSL, despite many ineligible courses
having strong employment outcomes (PC 2020a, p. 301). And VSLs are not available for any course below
the Diploma level. This means that VET students, unlike higher education students, often face upfront fees.80
The lack of harmony in funding arrangements between higher and vocational education can mean poorer
matching of skill formation with skill needs. This arises for a few reasons.
• Upfront costs may discourage some people accessing VET altogether — meaning they miss out on any
kind of post-school study despite its growing necessity. This is costly for students and society, as
completing VET courses improves students’ earnings (Polidano and Ryan 2016). These damaging effects
may be larger for more disadvantaged students for whom an upfront fee is more burdensome.
• Students may elect to undertake lower cost VET courses even if these produce lower returns.
• Students unable to meet the upfront costs of VET may opt for university instead even when it is notefficient for them to do so (Norton, Cherastidtham, and Grattan Institute 2019). Some higher education
students have poor outcomes, either not completing their qualification or not finding relevant employment,with costs to the students and government. At least some of these students would have completed theirstudies and entered their desired job if they had been able to undertake a VET qualification. The likelihoodthat differential access to ICLs leads to switching between university and VET providers will probably
mostly relate to Diploma courses.
The VSL scheme has succeeded in removing financial barriers to VET for the eligible courses. Almost all
VSL students (94%) reported that, without their loan, they would not have been able to afford their course
fees (KPMG 2020, p. 104). But this also suggests that financial barriers are significant for students unable toaccess a loan.

Expanding loan access to more VET courses
For these reasons, there is merit in expanding VSL to more Diploma-level courses, as well as potentially to
Certificate IV and III courses. Certificates IV/III provide comparable increases in earnings and other
employment outcomes as Diplomas (Polidano and Ryan 2016a, p. 31), and these courses are often shorterand cheaper, meaning debts are likely to be smaller. While their lower costs mean that the barriers posed by
upfront fees will typically be less than for Diplomas, the costs can still be significant for some cohorts. If
students are only able to access loans for Diplomas, they would be financially encouraged to takehigher-level VET courses even if these suited them less well.

80 Students that are accepted into university for undergraduate degrees receive a Commonwealth supported place, andhave the costs of their education subsidised by the Australian Government, with the remainder of the cost of thequalification deferred through an income-contingent, interest-free loan known as HECS-HELP. University students that
do not receive a Commonwealth supported place — for example, because they are undertaking a master’s degree — arealso often eligible for another ICL, FEE-HELP.
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5-year Productivity Inquiry: From learning to growth Inquiry report

Some participants in this inquiry argued ICLs should not extend to Certificate III. For example, JCSF
Consulting submitted that rather than ICLs, full public subsidy may be justified due to poorer employmentoutcomes81 and as Certificate III is also undertaken by students enrolled in school (sub. 97, p. 3).
Repayment prospects appear to be qualitatively similar across AQF levels, including Certificate III(figure 3.7).82 Nonetheless, expansion of loan arrangements poses some budgetary risks, particularly as theshare of VET students undertaking Certificate III courses is significant.83
Figure 3.7 – Repayment prospects are reasonably similar across AQF levelsa
Expected ICL subsidy ratio by qualification under various repayment scenarios

Expected ICL subsidy ratio (%)

45

Range of estimates(depending on repayment schedule)

40

35
30
25
20
15
10
5

0
Certificate III

Certificate IV

DiplomaBachelor Degreea. Original modelling results were separated by gender; they have been pooled according to the gender split at eachlevel. The upper range estimate corresponds with 2015 HELP repayment terms, and the lower range estimate
corresponds with 2015 HELP repayment terms plus 3% of income between $50 000 and $54 000, 2% of income
between $40 000 and $50 000, and 1.5% of income between $35 000 and $40 000.
Source: PC (2020a, pp. 312–314).

Expansion of VSL should be gradual and informed by evaluation
A gradual and cautious approach to expansion is warranted, as students and RTOs may not always respondto ICLs as expected; and students undertaking Diploma and above courses can have differing characteristics
to those undertaking certificate courses.
The Australian Government, in consultation with State and Territory governments, should extend VSL
eligibility. Initially this should include all Diploma and above level courses with minimal exclusions. Rather
81 Note that Certificate III completers have poorer employment outcomes compared with Certificate IV completers,

however the uplift in income relative to not having the Certificate is similar for both cohorts (as Certificate III completers
may have done worse in the absence of the certificate) (Polidano and Ryan 2016).
82 While the modelling underpinning the estimates appears to show that ICL recovery rates are more positive for
Certificate IV level courses than bachelor degrees, this may not be a robust result for two reasons. First, the estimatedaverage loan size for Certs III and IV may be too low, and second, the modelling does not exclude Trade Support Loan
Students, who already have access to ICLs, and have positive repayment prospects. A full summary of these issues isdiscussed in box 10.2 in the Commission’s review of the Skills and Workforce Development Agreement (PC 2020c).
83 In 2021, the highest number of VET qualification enrolments were at the Certificate III (39%), followed by Certificate IV
20%, and Certificate II (19%) (NCVER 2022b).
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Investing for future skill needs

than current eligibility restrictions (which exclude more than half of Diploma and above level courses), only
courses that are primarily undertaken for leisure or that yield poor employment outcomes should be
excluded. After monitoring and evaluating this change, assessing impacts on participation and employmentoutcomes, VSL could progressively be extended to Certificate IV courses. Subsequently, an expansion to
Certificate III could also be considered, based on an assessment of whether expansion to Certificate IV wassuccessful and the latest information about repayment prospects for Certificate III.
Before each stage of expansion, the Australian Government Actuary should be tasked with investigating
more thoroughly how different repayment settings would affect debt recovery. As in the case of HELP loans,the precise income thresholds for repayment will need to be assessed as a necessary component of any ICL
scheme is to not require full repayment if future income is low.
The argument to expand loans to shorter courses is less compelling. Certificates I/II generally provide smaller
and less consistent earnings benefits (Polidano and Ryan 2016), and they are also heavily subsidised. And
while microcredentials contribute to lifelong learning, they are generally cheaper and more likely to beundertaken by those already in the workforce and funded by employers or by private means (section 3.5).

Controls are needed to avoid another VET FEE-HELP debacle
Many in the VET sector are wary of extending ICL to more VET students due to the rorting that occurred under
VET FEE-HELP (VFH), the predecessor to VSL. The implementation and regulatory oversight of an expansion
would need to be mindful of avoiding the unscrupulous behaviour seen under VFH, although the regulatory
framework underpinning VSL has addressed many deficiencies of VFH. In particular, VSL involves: stricter
compliance measures for providers; a ban on loan brokers; students regularly reporting their engagement; and,payments to RTOs being made in arrears (rather than in advance under VFH) (PC 2020a, p. 298). These
measures have seen VSL successfully avoid the pitfalls seen under VFH. Strong regulation, with ASQA playing
an active role, will need to continue to ensure the integrity of an expanded VSL scheme over time.
The gradual expansion approach outlined above will also assist in mitigating the risks, as lessons can belearned — and adjustments made — after evaluating each phase of expansion.
In the recent review of the Skills and Workforce Development Agreement (NASWD), the Productivity
Commission recommended that upfront loan charges be levied on students so that they have ‘skin in the game’
when choosing a course. However, in practice, when contemplating a course, the time commitment andopportunity cost is likely to be a more important factor in decision making than a nominal upfront fee. Further,
upfront fees have not been needed to protect students taking up HELP or VSL loans. The risk of poor decisions
by students seen under VFH were likely largely attributable to aggressive marketing strategies that have now
been banned. Controls on unscrupulous behaviour are more effectively placed on providers, rather than
through upfront fees for students. Students would also benefit from the Commission’s recommendation toaddress information gaps, including relating to student fees and RTO quality (PC 2020c, p. 210).

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5-year Productivity Inquiry: From learning to growth Inquiry report

Finally, loan caps are necessary to limit costs to students and the Government. As ICLs reduce student
sensitivity to course fees, their wider application means that providers may be able to increase course prices
well above their delivery costs. Under a loan cap arrangement, RTOs are not prevented from charging fees
higher than the cap. However, as the student pays the difference, they must be convinced that the additional
cost is justified. In its review of the NASWD, the Productivity Commission recommended that the number ofloan caps be expanded, and reformulated based on efficient delivery cost data (PC 2020c, p. 322).

Loan fees should be applied equitably to all tertiary loans
A loan fee is a charge added to a student’s loan to increase cost recovery across the cohort, limiting
government spending. The loan fee is added to the value of the loan; upfront payment is not required. Thismeans that loan fees are unlikely to impact student choices about what to study.
However, they are not currently applied equitably. A loan fee of 20% applies to VSL students receiving
training from a fee-for-service provider and students at (non-university) institutes of higher education. Thereis no compelling reason why this fee does not apply to students in subsidised places (or, for that matter,
university students). There is no evidence that repayment risk varies between these student cohorts. Someparticipants advocated for consistent loan fees (JCSF Consulting, sub. 97, p. 3; IHEA, sub. 120, p. 4).
Loan fees are progressive as higher income graduates cross-subsidise lower income graduates who repay
more slowly or do not fully repay. Spreading loan fees to a broader student base would be more equitable andcould allow for the loan fee to be levied at a lower rate. For example, the Grattan Institute suggested auniversal loan fee for all HELP loans could be levied at 15% (Norton and Cherastidtham 2016). The
Productivity Commission found a loan fee of about 9% applied to all VSL would be budget-neutral (PC 2020c,
p. 324), although this may need to be adjusted for any expansion of VSL.84 Ideally, loan fees should apply
equitably to all tertiary students, and at a lower rate that accounts for the repayment risk across the full cohort.
Finally, even with loan fees, some share of debt will not be recovered. ICLs are provided by the AustralianGovernment, while VET subsidies are borne by State and Territory governments. Accordingly, expandingloans may encourage State and Territory governments to reduce VET subsidies. To mitigate the risk of thistype of ‘cost-shifting’, both levels of government will need to negotiate to either extend current sharing
arrangements for VSL debts not expected to be recovered (and concessional interest costs) or offset thiscost by adjusting the Australian Government’s funding component.

84 Further, as this only accounted for VSL, a uniform loan fee across all higher education and VET loan programs could

be budget-neutral at an even lower rate (given the large share of undergraduate university students compared withstudents attending other providers).
84Investing for future skill needs

Recommendation 8.7
Expand loan eligibility to more students
The Australian Government, in consultation with State and Territory governments, should gradually
expand VET Student Loan eligibility.
• Access should expand to more Diploma and Advanced Diploma level courses. Instead of current
criteria, all courses should be eligible except those that are primarily taken for leisure or havedemonstrated poor labour market outcomes. This expansion should be evaluated after a suitable
period, including observed effects of the earlier expansion on student participation, course decisions
and employment outcomes; and any evidence of rorting by providers. Following this evaluation, andaddressing any implementation issues, eligibility should also be considered for Certificate IV andCertificate III courses.
• Loan fee arrangements should also be equalised across the tertiary sector, levied on all students
regardless of type (that is, extended from fee-for-service VET students and non-university higher
education students to include subsidised VET students and university students). The loan fee rateshould also be lowered reflecting application to a broader base of students.

3.5

A culture of lifelong learning for an agile workforce

Lifelong learning, however achieved, is critical to stable employment, wages and the adaptability of an
economy (PC 2020c, p. 416). Labour market trends suggest a growing need for upskilling and reskilling
given changes in the nature of work and structural shifts in the economy, particularly the rising importance ofdigital, dynamic, and service-oriented skills.
Participants emphasised the role of lifelong learning and the need for digital skills in the workplace.85 Someestimate that workers (between 2018 and 2040) will need to spend an additional three hours of learning per
week, which is about a 33% increase (AlphaBeta 2018, pp. 3–4). The average Australian worker is expected
to change occupations 2.4 times by 2040 and have the nature of their work tasks change by 18% every
decade (AlphaBeta 2018, pp. 3–4). It has been asserted that ‘the days of relying on an increasingly dusty
certificate or degree over a 40 to 50 year career are long gone’ (BCA, sub. 181, p 12), although this probably
underestimates the degree to which lifelong learning has been important in the past.
Like all forms of education, learning in adulthood can improve worker productivity by building on and expanding
skills, and enabling movement to new industries with greater demand and higher wages. Increasing job related
skills and job prospects are the two main reasons for participating in formal study (ABS 2022g).86 Indeed,
research has found that mature-age education has positive (though modest) impacts on wages, job satisfaction,
retention and higher use of skills in workers’ jobs (Coelli, Tabasso and Zakirova 2012). There is some evidence
that completing vocational qualifications that are no higher than the highest level of education already attained
does not improve labour market outcomes (Polidano and Ryan 2016).

85 See for example: BCA, sub. 181; Internet Association of Australia, sub.168; JCSF Consulting, sub. 97; The Software

Alliance (BSA) sub. 134; Australian Investment Council, sub. 135; AHRI, sub. 54, ASBFEO, sub. 64.
86 That said, increasing job prospects is a more important motivator for learning earlier in life with an average of 48% of
25-44 year-olds reporting it as their main reason for study compared with adults aged 45-64 (34%). Individuals havevarious private motivations to study later in their careers, including higher salaries and greater work satisfaction.
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Positive spillovers from lifelong learning are likely to increase as working lives lengthen and as evolving skill needs
require upskilling or reskilling (chapter 1). For example, it can help displaced workers transition to new occupations
and industries. This could help to avoid or shorten unemployment spells and lower transition costs, particularly insome regional areas where an inadequate skills base is an impediment to economic transition (PC 2017b, p. 73).
Lifelong learning also has broader benefits beyond improving employment outcomes — such as personal
empowerment, engaged citizens, improved health outcomes, financial literacy and wellbeing — a point noted bypractitioners in the Adult Community Education sector (Mason and Carr 2021, p. 129).
Australia has relatively high adult participation in formal training among OECD countries. Australia has the equal
highest rate of enrolment for people aged 40–64 years (3 times the OECD average), and equal third for people
aged 30–39 years (2.3 times the OECD average) (PC 2020c, p. 417). Adult learning occurs in many contexts —formally, at universities, VET providers and more informally at work, from local communities and libraries. Some
42% of Australians aged 15–74 years have participated in formal or non-formal training in the past 12 months(ABS 2022g).87 But there has been some decrease in training since 2005 among people aged 25-55 (figure 3.8).
Demand for lifelong learning is difficult to cultivate, and requires equipping young people with the skills to learn
early, as well as a collective acknowledgement of the benefit and value of ongoing learning.
Figure 3.8 – There has been some decrease in learning by 25-55 year-olds since 2005a,b
Participation in formal or non-formal learning by age group
100
90

2005

2013

2017

2021

Participation in training (%)

80
70
60
50
40
30
20
10
0
15 -1920 -2425 -3435 -4445 -5455 -6465 -74a. Comparison between 2005 and other years should be made with caution due to different methodology, scope and sample
size. In particular, 2005 data (SEW) was based on a household interview with any responsible adult on behalf of all persons
aged 15-74 years in the household. Whereas 2013 onward (WRTAL) was based on an interview with one randomly selected
person aged 15-74 years in the household. b. Participants interviewed were asked if they had undertaken learning in theprevious 12 months, although the relevant 12-month window varied between iterations of the survey (2017 and 2021 refer tothe 2016-17 and 2020-21 financial years respectively).
Sources: ABS (Work-Related Training and Adult Learning, Australia, for Apr 2013, 2016-17 and 2020-21, Cat.
no. 4234.0); ABS (Education and Training Experience, Australia, 2005, Cat. No. 6278.0).

87 Formal training results in a qualification or certification.

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Investing for future skill needs

Current government support is focused on initial skill acquisition
Governments also support lifelong learning through a range of programs and funding mechanisms (box 3.6).
While most programs are neutral in respect of the life stage of the person, much of this investment is directed
at formal qualifications and initial skill acquisition completed earlier in life.
• In VET, a greater proportion of younger students are government-funded, with 51% of students receiving
government funding aged between 14–24 years in 2021.88• In the university sector, higher-level degrees typically have far fewer Commonwealth supported places
than undergraduate courses. More generally, older individuals are less likely to enrol in university than in
VET (Coelli, Tabasso and Zakirova 2012).
This reflects the importance of education in the first 18–25 years of life as younger people require broadfoundational skills and credentials to secure early-career jobs (PC 2020c). Earlier investment in educationand training can also create larger economic benefits and positive spillovers. A person who completes theirdegree, certification, or apprenticeship early in life may spend 50 years in the workforce, contributing to theAustralian economy and its productivity (Polidano and Ryan 2016).
Moreover, early educational attainment is important for teaching people how to learn and improve their ability
to pick up new skills and is one of the strongest predictors of further training and learning (OECD 2021a). On
average, across the OECD, individuals with tertiary education were twice as likely to engage with adultlearning than those with secondary education or below (OECD 2021a). Starting a culture of lifelong learning
requires a strong foundational education and the skills and attitudes needed to support a curiosity andinterest in further training throughout life.

Box 3.6 – A range of government policies support learning later in life
A number of policies support learning later in life. Key Australian Government policies are outlined below,
and other policies exist at the individual State and Territory level.
Income-contingent loans available for higher education courses and some diplomas are not limited byage. Total caps on loans are sufficient to enable most learners to undertake initial qualifications as well
as further learning later in life. Subsidies for tertiary education are also available to people of all ages,
although there may be fewer places for postgraduate courses.
Personal education expenses may be eligible for a tax deduction if courses result in a formal
qualification, relate to current work activities and skillsets, and will likely result in higher wages. A
minimum threshold of $250 for deductible expenses was removed in December 2022 to account forcheaper, shorter courses (ATO 2022a).
MicroCred Seeker, an online marketplace for microcredentials funded by the Australian Governmentand built by the Universities Admissions Centre (UAC) in 2022, provides potential students withcomparable information on microcredentials offered in Australia. Australian higher education providers
registered with TEQSA are currently able to list their courses.
In the 2020-21 Budget, the Australian Government funded an additional 50 000 Commonwealthsupported short course places in national priority areas (Department of Education 2022b).

88 Commission estimates based on VOCSTATS data, 2021.

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5-year Productivity Inquiry: From learning to growth Inquiry reportBox 3.6 – A range of government policies support learning later in life
The Small Business Skills and Training Boost (announced but yet to be legislated), encourages small
businesses to invest in ongoing training. Under the boost, businesses with less than $50 million in annual
turnover that invest in eligible courses for their employees will receive an additional tax deduction of 20%of the training expenditure between 2022–2024 (ATO 2022b).
Targeted employment programs also support further training.
• Workforce Australia (replacing Jobactive from 4 July 2022) helps underemployed and unemployedindividuals to navigate and subsidise training and reskilling to improve labour force outcomes(DEWR 2022f). There are a suite of programs under Workforce Australia including the Employability Skills
Training program that support people finding jobs and improve industry specific skills (DEWR 2023).
• The Skills Checkpoint for Older Workers program helps people aged 40 years and over who areemployed or recently unemployed to get career advice and subsidised training (with reimbursements
up to $2200) (DEWR 2022c).89

There may be underinvestment and barriers to lifelong learning
The wide-ranging benefits of lifelong learning mean that all parties — governments, businesses andindividuals — should have an interest in supporting it.
While individuals contribute to the cost of adult training, most costs are borne by others. An adult learningsurvey found that 87% of people aged 15-74 completing work-related training in 2020-21 did not incur
personal costs (ABS 2022g). Individuals often have many supports to pursue training either provided bygovernment or paid for by employers. Nonetheless, higher proportions of people working in some industries
report incurring personal costs for work-related training. For example, 19% of survey respondents working in
the health care and social assistance industry said they incurred personal costs for training compared with
6% and 7% in the manufacturing and financial services sectors respectively (ABS 2022g). Moreover, 33% of
people working in smaller firms (less than 20 employees) reported having personal costs for training as
opposed to 6% in firms larger than 100 employees (ABS 2022g).
While businesses pay for a sizeable share of existing training, they arguably tend to underinvest in generaland more transferrable skills as they face the risk that they will not recoup their investments in skills if theiremployees leave. There may also be more general spillovers from training that are not captured by thebusiness or the employee if the skills accelerate innovation.
In 2020-21, 5% of Australians aged 15-74 wanted to take formal training in the preceding 12 months but
were not able to (ABS 2022g). Similarly, 7% (down from 11% in 2016-17), wanted, but were unable to takenon-formal courses (which can be both work related or for personal interest) (ABS 2022g). As people age,they are less likely to report barriers to learning. This may reflect a lack of demand for, or culture of, lifelong
learning, as well as an increased ability to pay for any further study.

89 Mid-Career Checkpoint, a separate program piloted in New South Wales, Victoria and Queensland ceased operationin December 2022. It gave participants customised skills and training plans and career advice, and access to a training
incentive of up to $3000 recommended by the training plan and targets skill gaps in the economy. This was available forpeople re-entering the workforce, carers returning to work, and workers at risk of unemployment (DEWR 2022e).
88Investing for future skill needs

It is important to consider the barriers people face when seeking adult learning to inform whether and how
government support should be provided. Those facing barriers to training most commonly reported
insufficient time or financial barriers as the main obstacles. Barriers varied by age, gender, employment
status, family structure, household income and relative socio-economic disadvantage (ABS 2022g). As
household income increases, fewer people report financial barriers as hurdles, but a lack of time toundertake training becomes more important. More generally, people who were unemployed, single parents,
or lived in more disadvantaged areas were more likely to report barriers to formal learning.
Governments can only act to address some of these barriers. In particular, they have limited ability to help
those lacking the time to study as providing them with the equivalent of their wages would be fiscallyuntenable. While imperfect, increasing flexibility in course provision and accreditation pathways may help
those facing time constraints. Reflecting these difficulties, current policies mostly create financial incentives
to complete work-related training (box 3.6).
Some policy-relevant barriers and opportunities for reform remain. There may be underinvestment in lifelong
learning, particularly for general skills and for low-income workers. The challenge for government is devising
policy instruments that could address such under investment without crowding out investments that would beotherwise funded by businesses or people themselves. Policy in this space should aim to target barriers,
bolster transferrable skills and support reskilling (figure 3.9).
Figure 3.9 – Lifelong learning policy should aim to be additional

Additionality is central to effective government policy in lifelong learning

Targets barriers
Alleviates real barriers
to uptake of further
learning, like insufficient
funds or time

General skills
General andtransferable skills are
more likely to havepositive spillovers

Not crowding out
Individuals andbusinesses who can
pay for training
privately to continue
to do soA consolidated effort to support lifelong learning
There are a myriad of programs and supports offered by Australian, State and Territory governments thattarget different subgroups, encourage or create awareness for pathways into learning in adulthood. Most
either target financial barriers or help people who are unemployed, underemployed or out of the labour force
train to improve their job prospects. But there are many policy overlaps and some gaps. Moreover, thenumber of options can be overwhelming and difficult to navigate and while some programs offer careeradvice and caseworkers to help navigate the policy tapestry, others, do not.
A consolidated and strategic approach to lifelong learning should focus on policies and incentives that target
barriers to uptake. To achieve this governments should evaluate the effectiveness of supports available, as
well as pilot new approaches to inform a strategic and prioritised policy program.90

90 The Tasmanian government has developed an Adult Learning Strategy for 2020-2023 which aims to expand literacy andnumeracy programs; improve coordination of available services and the information available for learners; and, increase
community engagement with adult learning through a variety of policy initiatives and supports (Tasmanian Government 2020).
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Evaluate and assess effectiveness of financial supports
Some existing policies help those who are unemployed and outside the labour force to gain training and careeradvice while others, such as the Small Business Skills and Training Boost subsidise business training costs.
These policies have eligibility criteria that create gaps at the margin and some overlaps (though often eligibility in
one program can sensibly nullify eligibility in another – for example students funded by CSPs are not eligible forthe self-education tax deduction).
There is little formal analysis of the success and additionality of financial and tax-based policies in Australia
and overseas and so it is difficult to reform and prioritise policies to increase their effectiveness.
However, there are good grounds for some policy changes and instituting an evaluation program that aims todevelop a consolidated and strategic approach to financial supports for lifelong learning, including rigorous
assessment of any programs with major budgetary implications.

Incentivising individual investment in training through tax deduction
The self-education tax deduction provides incentives for lifelong learning but is too narrow in its current form.
Reskilling in areas that do not relate to or increase income in one’s current employment is not eligible for adeduction — this could include general skills such as digital skills.91 These constraints exist partly because itis easier to determine what skills are work-related, reducing the administrative burdens, and partially to avoid
government paying for personal interest learning, which is less likely to create positive spillovers. Despite therelative complexity, broadening training to include reskilling efforts that may increase future income might bedesirable (RUN sub. 154 pp. 4–5). For example, it may allow people to retrain before being made redundant
reducing unemployment spells for people exiting declining industries.
It is difficult to define the boundaries for a greater capacity for self-education tax deductions. Avoiding fraudulent
behaviour and maintaining the integrity of the tax system would be important considerations in designing thispolicy. Treasury has run a consultation process to assess broadening the deduction to reskilling efforts. They
noted that identifying how a course links to an individual’s future earning capacity is difficult in somecircumstances but that one way of limiting the deduction is to courses recognised by regulatory bodies(Treasury 2020, p. 7).92 However, this approach may be overly limiting. There are many courses not provided byregistered domestic providers that deliver useful forms of education, especially later in peoples’ careers.
Some Australians have few resources to fund their training — such as unemployed people, those outside thelabour force, and people earning low incomes. Existing programs target many of these groups (box 3.4),
although there may be a gap in supporting the training of older lower-wage workers — including those whoare standard contractors or working in the gig economy.
A new self-education tax deduction is of limited value to people on low incomes as they pay little or no tax. Not
surprisingly, a Dutch study found that income tax deductions are usually taken up by higher earners with almost no
take up by single people with relatively low incomes (van den Berge, Jongen and van der Wiel 2022). A voucher thatfunds low-wage workers to undertake training (including training that targets general skills and reskilling to shiftacross industries) overcomes the financial barriers better than any deduction. One voucher program in Victoria
increased mature-age VET participation (though the magnitude of this effect depended on how many voucher
recipients substituted away from fee-for-service VET) (Polidano, van de Ven and Voitchovsky 2021, pp. 1031–1033).

91 Expenses eligible for tax deductions are for training that either:- maintain or improve the specific skills or knowledge you need to perform your current employment activities- or are likely to result in, an increase in your income from your current employment activities.
92 That is, TEQSA, ASQA, the Victorian Registration and Qualifications Authority (VRQA) and the Western Australian
Training Accreditation Council (TAC).
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Investing for future skill needs

Targeting business co-investment in training
The yet-to-commence Skills and Training Boost (the Boost) is a potential mechanism for stimulating training
in businesses, which requires co-investment through a 20% tax deduction. The Boost is a costly program(with an expected budgetary cost of about $550 million over the forward estimates) (Commonwealth ofAustralia 2022a, p. 26). While targeting small businesses may increase additionality, there is still asubstantial risk that considerable taxpayer funding will support activity that would otherwise have occurred.
This means there is an imperative for rigorous evaluation of the net impacts of the Boost on valuabletraining.93 A further challenge is that while a business tax deduction presents a convenient mechanism toincentivise training — especially as it requires co-investment from businesses — the policy is still limited topeople who are employed and is likely to encourage training in skills that relate to employees’ current jobs.
This may limit the spillovers and potential additionality of such spending. Evaluating the Boost can help
better understand whether to continue or adapt the program.

Increase accessibility, awareness, and flexibility of available options
Increasing access to lifelong learning involves tackling the financial and time barriers to study (but also ensuringthat people know about available supports). For many, taking on any kind of training hinges on the flexibility ofcourses as time constraints present a central barrier. More flexibility, not only in the delivery of courses but also intransferability and recognition of skills acquired allows students to tailor study to their changing needs. Currently,
there is a dizzying array of learning options — microcredentials, formal qualifications, informal courses, local andinternational options, work-experience opportunities, and internships among others — as well as a number of
supports depending on individual circumstance. Increasing uptake might also rely on raising awareness of thepathways available, as well as the potential benefits of upskilling and reskilling to spur proactive action.
Flexibility in learning can be improved by broadening recognition of skill acquisition. Indeed, about half of
employers used unaccredited training in 2021 (NCVER 2021a). One way to provide flexibility in learning pathways
is to introduce more exit points in formal study which give students the option to get recognition for study they
have completed even if their circumstances or career goals change (chapter 4). Another is by increasing theincidence and recognition and the benefit from completing microcredentials and more informal training options.
Making publicly-funded universities’ lecture materials available online can increase access to learning materials
that can support informal learning and stimulate interest in subsequent formal education (chapter 4).
Recognition of prior learning can help students move through training pathways more easily. Some positivechanges are in train. The 2019 Review of the AQF recommended that the framework be revised to encourage
credit recognition within and across sectors. The key recommendations included simplifying the levels of the
AQF to acknowledge different pathways; avoiding unnecessary hierarchical structures; and, developing
guidelines for translating microcredential into credits for AQF qualifications (Noonan 2019, pp. 12–15).
Formal recognition of microcredentials is complex. Microcredentials cover different skills at various AQF
levels and do not cohere to current bands (Noonan 2019, p. 58). Moreover, a central benefit tomicrocredentials is their ability to adapt to innovation quickly; this may be stifled by AQF requirements andadded administrative burdens (Noonan 2019, p. 58). Other concerns include inconsistent quality and theassociated risk to other qualifications recognised by the AQF (Noonan 2019, p. 58).
The National Microcredentials Framework was developed to provide an integrated approach for informal
recognition of microcredentials, and to develop a microcredentials marketplace (DESE and PwC 2021, p. 6).

93 Some interested parties are concerned that its effectiveness will not be apparent by the time it is scheduled to end in

2024 (BCA, sub. 181; MYOB, sub. 198).
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5-year Productivity Inquiry: From learning to growth Inquiry report

MicroCred Seeker was launched in late 2022 and aims to provide consistency of information to enhance
student choice and facilitate better recognition of microcredentials.
The Productivity Commission has previously noted that comparator websites need to be impartial, curate
information to suit students with differing circumstances, continuously update and assess the information
presented to minimise misleading consumers, and avoid oversimplifying (PC 2020c, p. 195). Informed choice
requires support and good quality, complete, comparable and accessible information (PC 2020c, p. 195).
While still in development, MicroCred Seeker does not provide complete information, not only because many
providers are yet to upload their course offerings, but also because, currently, only TEQSA-registeredproviders are able to upload courses. While there may be an intention to expand this, such limited scope(which excludes not only international providers but, importantly, many domestic providers including thoseregistered with ASQA) risks the website failing to achieve both of its aims — to provide clear information ofavailable options, and a consistent format and language that enables better cross-accreditation.
Recommendation 8.8
Consolidate support for lifelong learning
The Australian Government should consolidate and examine the effectiveness and accessibility of available
programs to support lifelong learning and to reduce gaps and increase uptake. In doing so, it should evaluate
the effectiveness of targeted programs to inform and prioritise policies for a consolidated lifelong learning
strategy by:• trialling policies that target support at employed lower-income people, including vouchers for careerplanning and work-related upskilling and reskilling• evaluating the incoming Skills and Training Boost to assess its effects on the uptake of additionaloverall training, the skills it develops, productivity, labour mobility, and the characteristics of thebusinesses most responsive to the measure. Government linked administrative datasets will be usefulfor such an evaluation but might need to be supplemented• extending the existing capacity for self-education deductions to education that is likely to lead to
additional income outside of the employee’s existing employment. This change should be evaluatedafter a suitable period, and pursued subject to assurance that strong integrity measures can effectively
reduce the risks of fraudulent claims• examining the effectiveness of training programs delivered to people who are unemployed and thosetransitioning to work such as Employability Skills Training programs, particularly for people later in life.
Government should also increase the accessibility, flexibility, and coherence of available pathways by:• extending income-contingent loans to more VET courses (recommendation 8.7)
• providing alternative exit opportunities through the provision of nested qualifications (recommendation 8.13)• requiring publicly-funded universities to make their lecture materials available online, with considerationof extending this to some aspects of government-funded VET where that is practically feasible(recommendation 8.9)
• ensuring that the Australian Government’s Microcred Seeker extend beyond courses supplied by
TEQSA-recognised providers to the VET sector and where possible, to other private andwell-recognised domestic and international course offerings• constraining regulations that make acquiring new skills and moving to new occupations overly onerous.
Most particularly, through regular review of occupational licensing policies and addressing issues inscope of practice (reform directive 10).

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Boosting learning outcomes for tertiary students

4.

Boosting learning outcomes for
tertiary students

Key points
Getting the most from mass investment in post-secondary education will rely on lifting its quality,
especially with the growing role of the sector in raising the skills of new generations of Australians.
• There are large variations in provider performance and a significant minority of higher education students do
not rate their educational experience well.
• Universities have weak financial incentives to raise their teaching quality and tend to favour research overteaching. Some non-financial factors counter these perverse incentives, but not by enough.
• More needs to be done to promote quality teaching and leverage the opportunity presented by the shift togreater online delivery in recent decades, accelerated by COVID-19 pandemic restrictions.
Due to the variety of motivators at play, improving teaching requires a multi-pronged approach. The
Australian Government should:• bolster the visibility of teaching by requiring universities to share all lectures online and for free.
• improve evidence and indicators of performance by: facilitating external teaching quality assurance;
extending the evidence gathering role of the Australian Education Research Organisation to cover both
vocational education and training (VET) and higher education; and, refining and validating quality indicatorsof tertiary education.
• improve teaching prestige by funding research and innovation in teaching.
• hold off implementing the proposed performance-based funding of universities, instead exploring the optionof financial rewards to providers that have made successful efforts to improve their teaching quality.
Better student supports and guidance by universities would lower non-completion rates and avert theassociated waste, loss of talent, and debt. The costs for those who exit can also be reduced.
• A new government grant program would help fund experimentation with new retention strategies.
• Students who exit their university studies early are obliged to incur debt if they miss an obscurely-worded
deadline. Making it clear what the deadline means would help students make informed decisions.
• Providers should include at least one nested qualification in all bachelor’s courses so that those exiting early could
still meet criteria for a credential and have their prior learning more easily recognised if they choose to study later.
VET sector reforms currently underway will help secure its relevance, but rely on successful
implementation, as well as prioritising cross-sectoral skills, prompt training package updates,
supporting the VET workforce, and testing more flexible models of provision.

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The tertiary education sector’s contribution to productivity depends on the number of graduates and the quality
and relevance of the skills they acquire. In turn, the sector’s capacity to deliver student outcomes depends on its
capabilities and incentives, which are shaped by government funding and regulation (figure 4.1).
From a student’s perspective, a quality education includes course delivery (content, teaching, assessment,
and student collaboration) and interactions with providers (faculty, student support services and university
administration) that open up career opportunities and the capacity to contribute to society generally.
Education is also a good in its own right. People value the networks and the campus experience, which, bystimulating demand, have an indirect effect on increasing skill levels and productivity in the economy.
Figure 4.1 – Delivering quality in tertiary education
Quality outcomes• Skills• Labour market outcomes• Societal impacts• University experience

Capabilities

Incentives

1.
2.
3.
4.
5.

1.
2.
3.
4.
5.
6.

Teaching quality
Resources (e.g. IT, libraries, labs)
Content (breadth, depth, relevance, quality)
Credible assessment
Student support

Funding consequences
University governanceRegulatory oversightIntrinsic motivations
Esteem of teaching
Career progression

Drivers

The role of students

1.
2.
3.
4.

1.
2.
3.

Competition for students
Visibility of performance
Performance-based funding
University culture and recruitment practices

Exercising informed choice
Determinants of demand
Inherent capabilities

While tertiary education providers perform well on many dimensions of quality (section 4.1), Australian
governments have considerable scope to improve the functioning of the tertiary sector’s training role, a needaccentuated by the increasing diversity among students, changes in modes of delivery, and rapid changes inskill needs. This chapter concentrates on two key policy dimensions of the learning experience:• teaching and course quality: enhancing incentives to improve quality and relevance so that tertiary
study yields more valuable skills (sections 4.2 and 4.3)
• retention and completion: ensuring the system provides quality supports for students struggling tocomplete their studies where retention is in their long-term interest, or where not, to facilitate early exit tolimit waste of time and other resources (section 4.4).
This chapter gives less prominence to the policy issues in the VET sector, including those relating to quality
and completions. This reflects that the Productivity Commission’s recent review of the National Agreement
for Skills and Workforce Development (‘NASWD review’) identified a suite of reforms to improve VET quality,
relating to student experience, course content, and course delivery (PC 2019a, chapters 6 and 7). Moreover,
governments have commenced a VET reform agenda that is likely to make the VET sector more responsive
to changing skill needs, more open to innovation, and shift it away from its prescriptive competency-based
approach (discussed further in section 4.5). As a result, this chapter is focused on improving quality in the94

Boosting learning outcomes for tertiary students

higher education sector, particularly universities, which teach over 90% of higher education students,
although issues relating to the VET sector are also raised, where relevant.

4.1

How big are the quality problems facing higher
education?

As with schools (chapter 2), quality teaching is essential for getting the most from mass investment inpost-secondary education for students and the community. There are multiple avenues for considering thequality of teaching delivered by tertiary education providers, which entail a hierarchy of indicators from thedirect to the increasingly indirect:• post-education outcomes for students in terms of skills acquired (say, the capability of treating cataracts orwriting code to perform some computational task), lifetime employment outcomes, wages, job satisfaction,and the capacity to innovate and be creative• inputs that are likely to affect those outcomes, such as teaching and course quality, and facilities (likelaboratory equipment and access to academic journals)• the extent to which tertiary institutions have the incentives to provide quality teaching.
Each indicator has its advantages. If it were possible to know the causal influence of higher education on
outcomes with any assurance, then the first indicator would provide a good measure of the relative
performance of institutions by subject area and time. It would also provide useful information to prospective
students and a basis for performance-based funding.
However, even if causal effects could be measured, which is challenging (discussed in chapter 1 andappendix A), this provides little information about the ways in which an institution or the system could lift
performance. Knowing the link between inputs and outputs helps make choices about investments in teacher
quality and other supports.
Moreover, as teaching quality has many unobservable and subtle aspects, the financial and non-financial
incentives for quality are central. That is, if universities and their teachers suffer no ill consequences from poor
teaching, then it is less likely that teaching will be of high quality. In effect, the concern is that if mediocrity ischeap, then mediocrity will be abundant. Hence, it is important to assess the strength of the various financial orother incentives for teaching excellence. Changing these should be a key preoccupation of government policy.
Accordingly, gauging the ability of universities to improve people’s skills should consider a suite ofimperfect indicators.

The outcomes from university training are generally high, but
student perceptions are mixed
Over the medium term, university graduates have good labour market outcomes compared with those who
acquire skills via VET or school alone (chapter 1 and appendix A). Graduates almost all participate in thelabour market, having strong employment outcomes and low unemployment rates. They are likely to be inhigh-skill occupations and, associated with this, earn high wages. Employer satisfaction rates with graduates
are high (chapter 1). While some of these outcomes could be determined by the inherent capabilities of
those who attend university, the evidence still strongly supports a causal impact of attendance.
Nevertheless, the existence of these confounding factors, especially at the individual university level, makes
attributing outcomes to the actions of any given university hard, and is a key challenge to workable
performance-based funding (section 4.3).

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5-year Productivity Inquiry: From learning to growth Inquiry report

There are no objective measures of the teaching performance of higher education providers or of the degree
to which they raise skills, engage well with their students or provide adequate resources. Accordingly,
student perceptions based on the Quality Indicators for Learning and Teaching (QILT) are used to assess
performance along these dimensions, as imperfect as these are (appendix A and section 4.3). The picture is
one of mixed performance, with outcomes in 2020 and 2021 particularly affected by the shift to online
learning associated with COVID-19.
Figure 4.2 – Distribution of education quality across universities, 2021a
0.18
Skill development

0.16

Frequency

0.14
0.12
Teaching quality

0.1

Overall rating

0.08
Resources

0.06

Support

0.04
0.02
0

60

65

70

75

80

85

90

95

Performance ratinga. The data relate to 42 universities with the performance rating densities estimated using a Gaussian kernel. The
domains exclude learner engagement, which shows much greater variation in performance than shown here. However,regression analysis shows that learner engagement (which includes facets like feeling prepared for study, a sense of
belonging to the university, and the nature and level of interaction with other students) has very little impact on students’
overall rating of their university experience.
Source: Productivity Commission analysis based on SRC (2022c).

There are marked disparities in university performance on key domains of their educational functions, which
is a major motivator for finding policy approaches that raise standards amongst ‘laggards’ (figure 4.2). The
overall quality of teaching is the most influential explanator of the variations between students’ perceptions of
the overall quality of the entire educational experience, although student support and resources play aresidual role.94 Surprisingly, while students’ perceptions of skill acquisition are linked to perceived overallteaching quality, the subjective assessments of teaching quality have weaker links to observed labour
market outcomes. For instance, the medium-term full- and part-time employment outcomes of graduates do
not vary much across universities (SRC 2022d, pp. 12–16).

94 These results are based on analysis of student ratings across universities, and so seeks to explain the variations in theoverall ratings at the university level. This analysis is relevant to any model of performance-based funding. Further
analysis — not undertaken — could use student level data. This could inform the determinants of student ratings of theiroverall university experiences for each university and whether these were uniform across universities (which, given thenature of their student intakes and varying vocational orientation, is unlikely). This is a fruitful area for future analysis.
96

Boosting learning outcomes for tertiary students

Providers have mixed incentives to invest in teaching quality
In most markets, providers are financially motivated to focus on quality where consumers value this. This
dynamic is weakened in tertiary education for multiple reasons but not to the extent that some suggest.

The nature and funding of the ‘service’ limits conventional pressures for quality
Students do not know in advance how well a course is taught or whether it matches their specific interestsand capacities, but have to wait until they have commenced — that is, any specific course is an ‘experience’good (Quiggin 2016).95 While this problem might be addressed by providing students with information,
existing information lacks the required granularity to inform choices at that level. Higher education is not asingle good, but a multiplicity of services provided simultaneously and sequentially by numerous institutions
and staff. Even if there are some measures about the average teaching quality, that does not provide
information about specific courses and the people who teach them. QILT only provides subject-area
information and average provider quality measures, but, as discussed above, even this lacks muchcorrespondence to the ultimate career outcomes.
Instead, student choice often relies on other aspects of the institution, such as a vague perception of overall
quality or location. Most students expect to be able to physically attend university, and given the high cost ofrent, often prefer to stay at their parental home, reducing their options to the few universities in their city.
While there are many more VET providers in any major city, the VET system places little competitive
pressure on higher education providers except for a very few vocationally-oriented courses.
Moreover, given that part of the benefit of education is its signalling value (chapter 1), reputation andprestige are likely to play a larger role in student choice than teaching quality. Indeed, the US experiencesuggests there is no evidence that learning quality determines an institution’s success in the marketplace.
Instead the market favours selectivity, brand names, visibility and major research portfolios (Probert 2013).
Funding arrangements also affect competitive pressures. Fixed or capped fees for domestic undergraduate
degrees (and some VET courses) reduce incentives for providers to compete on quality as there is no
premium for doing so.96 The majority of Commonwealth Grant Scheme (CGS) funding is block-based andcapped, referencing each university’s historical level (chapter 3). This effectively sets a cap on student
places for each university, which, given demographic pressures, will soon start to bind. So long as auniversity can attract enough students up to its cap at its existing course quality, it has no financial incentives
to further improve quality. (The Productivity Commission’s recommended return to a demand-driven system(chapter 3) would ameliorate this problem.)Moreover, the upfront price of university is low due to the Higher Education Loan Program (HELP), so theusual salience of prices for motivating careful choice is weakened.

The primacy of research may have some effects
The incentives to invest in quality teaching are weakened if teaching is regarded as a less prestigious andimportant role of university staff than academic research (PC 2017c, p. 13). International rankings play an

95 In principle, so long as university places are not overly constrained, there can still be strong incentives for producers ofexperience goods to signal the quality of the product because if they can do so they can capture market share fromcompetitors or expand the market. However, universities have little capacity to issue service warranties given the
difficulty in objectively defining a defective service. The same problems affect the capacity of students to make use of theAustralian Consumer Law or the common law.
96 However, fees are not regulated for postgraduate courses and education provided to international students.
97

5-year Productivity Inquiry: From learning to growth Inquiry reportimportant role in attracting students, particularly international students, but all ranking systems give adisproportionate weight to research outputs and the fame of a few stars rather than teaching quality (Houand Jacob 2017).97 The Academic Ranking of World Universities (the Shanghai rating) includes no measureof teaching quality, with the rankings determined solely by prestigious prizes, citations, and publications in
Nature and Science. In contrast, the Times Higher Education rankings give more weight to teaching quality,
including through an academic teaching reputation survey, whose score contributes 15% to the rating. The
other dominant ranking system — the QS World University Rankings — has no explicit ratings of teachingquality but uses faculty teacher ratios and employer reputation as elements of the rankings, which provides,
at best, indirect measures of teaching performance.
The weight given to research capacity may not matter much if high research quality leads to high teachingquality, but the evidence for this link is tenuous (Cherastidtham, Sonnemann and Norton 2013). Indeed,across universities, QILT survey data suggests that for every 10 percentage point increase in the
research-only share of academics in a university — a measure of their research orientation — students’teaching quality and skills development ratings fall by about 2 percentage points. (This explains about 30%of the variation in quality and skill development scores between universities). This may not reflect an adverse
impact of research but may be attributable to other aspects of universities that tend incidentally to have a
research focus (the Group of Eight predominate among research-oriented universities). However, the results
do not support a positive nexus.
Notwithstanding the positive link between the teaching orientation of a university and students’ ratings,
commentators often cast a bleak light on the teaching role. Teachers may be stigmatised as ‘notresearch-active’ (Probert 2013, p. 4) or in need of relief from its burden:… academics seek ‘relief’ from teaching in order to pursue research as they would take medication
to relieve a headache. … The situation is not helped when resources for teaching are continuallysqueezed and it can be exacerbated in mass systems that require academics to manage everincreasing numbers of students with changing and diverse needs, backgrounds and attitudes tostudy. At the same time, ever-higher levels of competition in research make it harder for researchers
to devote scarce and valuable time to teaching. (Coaldrake and Stedman 2016, p. 96)
It is also easier for academics to signal their research capabilities, for example through successful grants,
academic publications and citations. There are emerging ways for academics to demonstrate their teachingexcellence, but they are recent (Olga Kozar 2021).
The internal labour structure of universities also suggests that research staff are given more primacy —having more secure employment and better career prospects. In 2021, about 70% of teaching only roles inAustralian universities were casual.98 This was only 6% for research-only academics and 2% for traditional
teaching-and-research academics (DESE 2022e). While academics engaged in both teaching and research
still account for the majority of teaching roles (63% in 2020), this share was higher in the early 2010s (atabout 70%). By definition, teaching-only academics only teach, and so contribute far more to teaching hours(about 70%) than their teaching-and-research counterparts (NTEU, sub. 36, p. 3).

97 Universities may mislead students in their use of such international indicators. In marketing its teaching quality, one

prominent university indicated that it was first in Australia and 32nd in the world with the implication this related toteaching. However, those rankings had barely any link to teaching quality, but to a wide range of performance metrics
that gave little weight to teaching. Using QILT measures, the university rated at the bottom or close to the bottom for allof the aspects relating to the student experience, such as teacher quality, skills development, and learning resources.
98 Including full-time and fractional full-time. The share of staff employed on casual contracts does not account for an
additional group that is employed on a sessional basis but counted among full-time (or fractional full-time) staff.
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Boosting learning outcomes for tertiary students

Does casualisation itself lead to worse teaching?
Putting aside the lower prestige that casualisation of teaching roles signals, its impact on teaching quality
depends on its impact on attracting talented people to teaching roles and acquiring teaching skills.99
On face value, the uncertainty of long-term job continuity and interruptions to employment during semester
breaks make a casual teaching role unattractive. Contracts can be terminated with little notice. The
vulnerability of such workers has been highlighted by widespread unlawful underpayment of casual
academic staff (TEQSA 2022a) and the mass layoffs of them during the COVID-19 pandemic (DESE 2022e).
Nonetheless, several factors at least partly offset concerns about the effects of the precarious employment ofteaching roles. For postgraduate students, casual teaching roles provide income while they study and, assuch, a financial incentive to perform well to keep their jobs while training. Other non-pecuniary incentives toperform well are also at play — discussed below. And notwithstanding some of the negative aspects of thejob, nearly 50% of casual sessional academic employees were employed for 6 years or more in 2019
(NTEU, sub. 36, attachment B, p. 6). This suggests some capacity for retention of a core group of staff toprovide stability for students and to develop teaching capability.100
Productivity Commission analysis of the NTEU and QILT data also suggests that casualisation ofteaching-only roles does not appear to weaken undergraduates’ perceptions of teacher quality. Based on
QILT data, across universities, a ten percentage point increase in the casual share of teaching-only roles
decreases student perceptions of teacher quality by about 0.4 percentage points, a tiny and imprecisely
measured effect that is statistically indistinguishable from a zero or even positive impact. Casualisation haseven smaller effects on perceived skills development.

Students have little recourse to independent complaint mechanisms
The capacity for ‘customer’ complaints can also provide incentives for quality. However, there are few
powerful avenues for complaints by university students. The Tertiary Education Quality and Standards
Agency (TEQSA) is not a complaints resolution body, and so only uses student complaints as backgroundinformation to inform systemic assessment of providers’ compliance (TEQSA 2022d). TEQSA takes ahigh-level view of providers, seeking to assure itself their internal institutional quality assurance
arrangements are robust, effective and sustainable (TEQSA 2017b).
Universities have their own complaints handling processes and are given advice about how to manage
these, but these are not independent from the university (ACTO, CO & OSO 2016). Very few complaints arelodged by students and most do not relate to teaching quality, but instead to appeals about grades,
behavioural matters, and mental health. For example, notwithstanding the tens of thousands of enrolled
students, the Australian National University recorded just 61 concerns about program, course or teachingquality in 2020 (ODS 2021, p. 46), which was a small fraction of total concerns and, given the QILT results,
must only be a negligible share of dissatisfied students.

99

While this chapter primarily relates to the higher education workforce, the teaching role in the VET sector has someother unique dimensions. In particular, given its job-ready focus, facilitating flexibility for individuals temporarily movingfrom industry into teaching, or to work part time in both, could be beneficial — particularly in VET, which works closelywith industry to maintain relevance of skills (PC 2020c, p. 242).
100 The ABS Census Longitudinal dataset between 2011 and 2016 indicates that 45% of tertiary education teachers in2011 were still in this occupation in 2016 (though these values also include VET tertiary teachers). This is considerably
lower than for school teachers and many other skilled occupation (such as trade and healthcare occupations), but
greater than for the many unskilled occupations.
99

5-year Productivity Inquiry: From learning to growth Inquiry reportAs tertiary education providers increasingly operate in a commercial environment, competing for students
and marketing their services, they can more clearly be said to be ‘acting in trade or commerce’ and therefore
subject to the provisions of the Australian Consumer Law (ACL) under the Competition and Consumer Act
2010 (Cth). In principle, providers could be liable — on several grounds — to pay compensation for breachesof the ACL or for negligence (Cohen 2016; Corney & LindLawyers 2020; Corones 2012; Goldacre 2013).
There has only been one notable case in Australia where a provider paid substantial costs for allegedly
inadequate training. In 2022, the Box Hill Institute settled for $33 million in a class action mounted by about
500 students undertaking an aviation Diploma (Precel 2022). The class action was based on alleged failuresof the Institute to guarantee the delivery of its services with ‘due care and skill’ and in a ‘manner fit for
purpose’, and on claims that it had engaged in unconscionable conduct and misleading and deceptive
conduct — all avenues for legal redress under the ACL. While a settlement provides no precedent value
about which, if any, aspects of the ACL apply, a settlement would not have occurred if there was doubt about
the capacity of the court to hear the matter. Nonetheless, unlike the competition regulator in the United
Kingdom (Competition and Markets Authority 2015),101 the ACCC has not provided accessible explicit
guidance to students and universities on the implications of the ACL.102
Nevertheless, few consider that the consumer law provides substantive protection. Guidance and clarity on
the application of the ACL would likely only partly ameliorate that.
Consequently, unless the problems were significant and systemic, universities and other educational
providers have little legal ‘skin in the game’ in terms of penalties for poor teaching quality or student
outcomes. So long as the student continues to study past the ‘census’ date (section 4.4), universities are
fully paid for their services, even if their offerings are inadequate.
It is also unlikely that creating a specialised body to hear students’ individual complaints, like the UK Office of
the Independent Adjudicator, would be worth the cost. The latter body covers all higher education students in
England and Wales. The Office spends about $10 million annually (in Australian dollars) and finalised about2600 complaints in 2021 of which 43% were found not to be justified (OIA 2022, pp. 5, 11, 49). Only 3% ofcomplaints were fully justified. Given the much smaller population of higher education students in Australia,
the number of justified complaints would likely be very small were Australia to emulate the UK model. The
most valuable aspect of such a body is that its existence alone may encourage universities to lift theirperformance, but this effect is unlikely to justify a new agency.
The Productivity Commission’s approach has accordingly given substantial weight to prevention of poor
teaching rather than difficult-to-apply remedies after poor service.

Existing review processes set a weak floor on quality teaching
The Higher Education Standards Framework requires providers to undertake a comprehensive review ofcourse delivery at least every seven years, supported by more frequent monitoring at a unit level. These review
activities are expected to encompass external referencing against comparable courses (including student
performance data) and incorporate student feedback. TEQSA (2017b, p. 3) notes ‘external referencing’ cantake the form of benchmarking, moderation or peer review. While this approach is appropriate for risk-based
regulation, it largely leaves each provider to manage quality assurance independently (alongside relevant
professional bodies and any accrediting organisations). In practice, although providers have public institutional

101 A recent UK House of Commons Committee report into the deficiencies of online learning during the COVID-19

pandemic has made explicit students’ rights under the consumer law (HoC 2020, pp. 12–16).
102 Although, the Australian Government has made clear to international students that their rights are protected underconsumer protection laws (Study Australia 2022).
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Boosting learning outcomes for tertiary students

review frameworks, the depth and impact of these internal reviews is not clear or likely to be consistent anddoes not serve as a useful basis for informing students or ‘disciplining’ providers.

However, there are powerful non-pecuniary incentives for quality
teaching
While there are many incentives for universities to underplay their teaching role, there are other factors thatsuggest that universities and teachers have considerable interest in delivering quality, and evidence of their
behaviours are consistent with this.
• Intrinsic motivations for excellence in any profession are often high, regardless of weak externalpressures. And no one gets peer esteem from being known as a bad teacher.
• Early career STEM academics in teaching-only positions report the highest level of satisfaction with theirworkplace compared with teachers undertaking both teaching and research (Christian et al. 2021), which
would tend to make teaching-only jobs a fulfilling option.
• Academia is a global industry, with many academics seeking jobs abroad in a highly competitive market.
Adding teaching excellence (if it can be verified) to a research publication record improves job prospects.
• Academics looking for promotion domestically in research-teaching roles often need to demonstrate theirteaching skill. For instance, teaching performance contributes 15% to the overall promotion assessment at
the Australian National University. While this is not high, getting a poor assessment may well stymie
career progression. As Melbourne University put it: ‘We want you to be research active and see no point
whatsoever in teaching, said no academic job ad anywhere’ (ArtsUnimelb 2018). So while there may not
be strong incentives for excellence, there are incentives to not be bad.
• Universities are making efforts to reward quality teaching and signal its value — through awards forexcellence. Some universities have also developed capabilities to promote higher quality teaching. For
example, in Melbourne University, there is a year-long program of support and professional development
for teachers, the Curriculum Design Lab was created in the Faculty of Arts to support teaching innovation,
while the Melbourne Centre for the Study of Higher Education has a repository of material for higher
education teachers. These kinds of initiatives are still imperfect and ad hoc. For example, while
universities are active in enrolling diverse student groups, there is evidence that their policies for genuine
engagement are often more aspirational than substantive (Baker et al. 2022).
• Providers routinely and voluntarily use a range of approaches to evaluate and assist teaching
performance — including student questionnaires, peer review and professional development. It is hard toreconcile the widespread use of these with a lack of interest in quality. For example, the Teaching
Innovation Unit of the University of South Australia offers its teachers a 10-week blended course inteaching excellence and has several types of collegial peer reviews (‘Peer Partnerships’ and ‘Teaching
Squares’) and a formal summative review process (UNISA 2023). A sample of other universities showed
many had similar programs.

The growth in online learning poses challenges and opportunities
Online delivery is now a ubiquitous feature of higher education. Online learning has three broad formats. The
most common and basic form — ‘Optional-online’ — gives students the option to miss in-person lessons andaccess them more conveniently at another time through recordings. The novel forms are ‘External-online’,with all learning and assessment online, and ‘Multi-modal’, which requires some in-person training or
assessment, with the remainder being exclusively online.
Online delivery offers greater access for people who might otherwise be unable to take classes in person,
such as people with childcare and work responsibilities or who are living in regional areas where there is no101

5-year Productivity Inquiry: From learning to growth Inquiry reportphysical campus (Stone 2017). It also expands options so that students living in one city can study inanother, which may increase competitive pressures in this market segment. Online formats also enableuptake of innovative technologies to improve student learning, such as the use of virtual and augmented
reality in health science instruction (Barteit et al. 2021; Canty et al. 2019; Chen et al. 2020), and more
student control over classroom dynamics, such as more student-led interaction (Paul and Jefferson 2019).
Pandemic-related restrictions in 2020 accelerated the uptake of online delivery as in-person delivery wasprohibited or discouraged.103 In the VET sector, a smaller proportion of registered training organisations(RTOs) shifted to fully external learning and assessment, given requirements for face-to-face work
placement. Still, many VET providers moved instruction to blended or external formats — the percentage offully face-to-face providers fell from 49% to 18% during the pandemic (ASQA 2021).
This transition was not smooth, particularly in the higher education sector. The first year of the pandemic saw
a spike in student complaints to TEQSA (TEQSA 2022b). A mid-2020 survey of 787 students at anAustralian university reported that 75% of respondents found it more difficult to study online than in-person(Dodd et al. 2021). However, these problems will at least partly reflect that the sudden onset of the pandemic
gave universities little time to plan for exclusive online delivery.
Putting aside these transitional problems, the effectiveness of online teaching and learning depends on thestudent, the course, the mode of delivery and the outcome being measured. A literature review of online
learning in US college courses found that most students anticipate compromised learning in entirely online
courses (Xu and Xu 2019, p. 29). However, these impressions do not appear to systematically translate topoorer academic performance. Multi-modal delivery saves time for students while yielding similar average
academic performance as face-to-face delivery (Alpert, Couch and Harmon 2016; Bowen et al. 2013). The
effect of the purely external format versus face-to-face delivery on student grades is more equivocal. In somestudies, it fares worse than face-to-face delivery (Alpert, Couch and Harmon 2016; Figlio, Rush andYin 2013) and some much the same (Paul and Jefferson 2019).
The effectiveness of online learning also depends on the level of investment by the institution. One possible
reason for the mixed results of purely external delivery is that the quality varies greatly by provider.
At the top end, developments in online provision have the potential to increase the overall quality of tertiary
teaching. These allow bundling in-person tuition with innovative digitally-supported instruction and integrationof MOOCs from other institutions (for example Wang and Zhu 2019), while also providing a resource forprofessional development of teachers (Despujol, Castañeda and Turró 2022). Taking advantage of thesedevelopments requires universities to invest in complementary resources and staff with online expertise.
At the other end of the spectrum, learning could be worse if the online delivery simply reproduces in-class
lectures, but with a less engaged lecturer and class. One subject at an Australian university offered ‘online
lectures’ that consisted of the class slides accompanied by an automated voice program reading them. If
providers view online delivery as a cost-saving device, allowing them to save on lecturer time, then quality
is likely to fall.
The flexibility afforded by online learning also depends on educators making their courses accessible forthose with disability, particularly the vision- and hearing-impaired (Pittman and Heiselt 2014; Prytz 2020).
Regardless of the form of online provision, students without stable internet access or adequate technology
103 The progressive expansion of online learning in Australia began long before the pandemic. Large private providers

have emerged online, such as Coursera and edX, and universities have recognised the potential to scale up offerings
through massive open online courses (MOOCs). In the years leading to the pandemic, about 30% of higher education
enrolments were already external or multi modal (Lodge et al. 2022). The proportion of individual VET subjects delivered
fully online grew from 6% to 13% between 2010 and 2017 (Griffin and Mihelic 2019, p. 10).
102

Boosting learning outcomes for tertiary students

do not have an equivalent learning experience to their peers — a disparity the pandemic highlighted (Means
and Neisler 2021). These are not reasons for reducing online delivery, but rather for improving digital
services104 and accounting for the need to vary how courses are delivered to students with diverse needs.
In-person teaching will return, as students value the ‘campus experience’ and the personal networks builtwith other students. But this will not crowd out ‘optional-online’ delivery, while external-online and to a lesser
extent, multi-modal, delivery will wane in importance but persist, as will innovation in the use of these modes(Richard Caladine, sub. 113; Universities Australia, sub. 195). In a survey of VET providers, 62% of RTOs
who moved instruction online stated they would use more blended learning in course delivery (ASQA 2021).
Where their pay structures do not already do this, allowances paid to teaching academics for professional
development to acquire online skills and for the additional time to prepare innovative online content may bejustified. There is some anecdotal evidence that as online delivery ramped up during the pandemic,
academics’ workload substantially increased (Zhou and Tariq 2021). To sustain innovative online delivery ina post-pandemic world, these additional workloads may persist, especially for new academics without
experience in online delivery. Failing to adequately remunerate teaching staff for the time to prepare quality
online material would likely lead to lower quality online teaching.

4.2

Leveraging information to promote quality

Revealing the performance and content of teaching provides incentives for universities and teachers to
improve, can facilitate peer learning, and in its own right serve to educate the wider community. However,existing approaches are out-of-date, and metrics that might guide students need further development.

Making the invisible visible
Most university lectures are now either posted or delivered online. This material is an under-exploited
resource for students, peers and faculty leaders, and there are few reasons for its use to be confined to thestudents attending the specific class. Divulgence of the material to other students, peers and the public moregenerally has several social and economic advantages:
It encourages higher quality teaching — teachers can gain insights into the approaches taken by peers
and will be motivated to improve their own teaching because it is more widely observable by students andtheir peers (including senior academics). In this respect, it has elements of formative assessment, but
mediated by technology. In turn, academic leaders would have greater incentives to ensure adequate
professional development as teaching quality would be more obvious to external parties.
It improves matching efficiency and empowers students — students contemplating a course could
observe the difficulty and relevance of the content and the pedagogical style of the teacher to see if it suited
their needs, while also giving them insights into quality. In effect, it would be a ‘try before you buy’ option thatwould partly address the fact that a university education is an experience good. It would be a complement to
information provided through QILT and other quality measures. The approach is consistent with the generalshift toward a consumer-centric focus by government-funded and regulated services — which recognisesthat services should accommodate people’s different preferences and capabilities and help them makechoices. In turn, the revealed preferences of students would strengthen faculties’ incentives to adapt theirapproaches to professional development, appointment of tertiary teachers, teaching and support.

104 As discussed further in this inquiry’s companion volume‘Australia’s data and digital dividend’.
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5-year Productivity Inquiry: From learning to growth Inquiry report

It assists in lifelong learning — for people who do not want to or cannot afford to go to university, and who
do not need accreditation. Open access would pull into the system a new group of students consuming
virtual lectures at zero cost but, as noted below, without cannibalising university revenues. At no budgetarycost, this would stimulate skill acquisition and productivity, especially for older people already in jobs forwhom the cost of a university education is less likely to be deferred (as HELP loans would be immediately
repayable if income thresholds were exceeded).
There are several choices about who could get access to the material and the extent of divulgence.
In a completely open model, all online lectures would be available for free to anyone — student or not. Free
provision is consistent with large public subsidies given to higher education and the non-rivalrous nature ofideas (one person’s consumption of an online resource does not reduce the capacity of anyone else to
consume it). The same principle underpins the requirement that research funded by government be shared
openly (for example, as in the NHMRC’s and ARC’s Open Access Policy), so extension to lectures is alogical progression. An open model would assist all teachers and all would-be students regardless of theinstitution because it would demonstrate excellence in teaching across all of them.
Universities may have some concerns that an open model would reduce their income from fee-based online
courses, and in particular from the international student online market. Income losses would be a risk if
prospective students could consume course material for free and sidestep universities via some otherreputable method for accreditation. That seems doubtful on several grounds. First, there are very limited
options for accreditation outside universities, which is an essential and exclusive function of universities.
Second, the university experience goes beyond the material presented in classes and includes assessmentand feedback, individual interactions between students and staff, and (for in-person students) the amenities
and experiences of university. It is notable that one of the world’s best universities, the Massachusetts
Institute of Technology (MIT), has made all its lectures available online for many years.105 There is little
evidence that free courses undermine enrolments in fee-based courses (for example, Johansen 2009), andindeed, they may increase enrolments if the university demonstrates its quality.
Universities may claim that the material is their Intellectual Property (IP). Resistance to change based on thatclaim ignores that government is an implicit shareholder in universities and could quite reasonably seek tomaximise the public returns of the investments it makes (noting that reverting to a demand-driven system willfurther expand the Australian Government’s stake in the sector). But any class content drawn from anotherIP source (such as MOOCs) should not be included.
Concerns about student privacy (for example, where they give presentations in class) can also be averted byseeking consent for the inclusion of their material or for selective publication of the lecture.
There are accordingly strong grounds for universities to be required to provide their lectures online to the
public on an open-source basis, but with no requirement that the universities accredit any training. The
requirement would be for the most simple least cost way of presenting the information.
An inferior option, but that would still improve teacher quality and assist informed choice by students, would
be online divulgence of a few randomly selected lectures of any given course to all students and teachingpeers in a university.

105 MIT highlights the benefits of its long-running open access provision of thousands of MIT courses for improving

teaching quality and supporting lifelong learning (MIT 2023).
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Strengthening performance measures
Information about the quality of higher education providers’ teaching may improve performance throughthree primary avenues. Higher performance ratings may increase student demand and revenue, which
creates financial incentives for universities to improve their performance if they can divert students fromcompetitors, or, in a demand-driven system, attract new students. Moreover, universities themselves may
respond to benchmark data to the extent that their relative status is a motivator for performance. The
regulator, TEQSA, may also use indicators of lacklustre performance for investigations of quality.
The capacity for metrics to have these effects depends on many criteria: Do students use ratings, and if so, in
an informed way? Is the data readily accessible? Do ratings meaningfully and accurately measure what mattersto students, government and the community generally? Does demand respond to ratings and do universities
attempt to increase their performance if their ratings are poor? Do they succeed? No comprehensive
assessment has been made of existing metrics based on the above criteria and doing so is best achieved bygiving that task to the Australian Education Research Organisation (AERO) (as discussed below). However, theProductivity Commission has assessed the available metrics against some of the key criteria.

Current performance metrics could be improved …
The dominant Australian performance measurement framework draws on QILT, which has strong facevalidity. It is similar in aspiration and design to the UK’s National Student Survey, but more comprehensive. It
covers most of the domains that are relevant to students — skill development, engagement, resources andteacher quality (appendix A). Survey responses are, by contemporary standards, high at about 40% for theStudent Experience Survey module (SRC 2022b, p. 2). QILT follows students after they graduate, measuring
labour market outcomes, employer satisfaction and whether skills acquired in training are used. There is also
relative stability in university ratings over time, which suggests some degree of reliability.106 Stable results
are necessary if ratings are to inform the choices of prospective students.
However, QILT has several deficiencies when evaluated against standard criteria for any performanceassessment tool — accuracy, precision, reliability and validity (AERA, APA & NCME 2014). The validity of
QILT — the extent to which it measures what is intended — is of particular concern. For example, it does notpredict labour market outcomes well (appendix A). A large-scale meta-analysis of the connection between
student evaluation and student learning found no robust correspondence (Uttl, White and Gonzalez 2017).
In principle, another deficiency of QILT is that it is implemented at the overall field of study level for each
institution, and so does not provide information about how individual components are delivered or of theperformance of any of the many teachers engaged in providing the training. However, overcoming that flaw
would need to address the significant problems associated with student assessments of individual classes
and teachers. The evidence suggests that student ratings of teaching quality are systematically biased
indicators, for example being biased against teachers who are female, ethnic minorities, or not from an
English-speaking background — or reflect dissatisfaction with a bad grade (Boring and Ottoboni 2016;

On many important metrics of performance, the correlation between an initial year’s scores and the next year is well
above 0.8 (the threshold for good reliability) and typically decays slowly for future years. For instance, using the share of
students who say teaching quality is excellent, the correlation between 2017 and 2018 scores is 0.95, and only falls to 0.86
between 2017 and 2021. Accordingly, to the extent that the metric is valid, 2017 score results would generally have helped
students make an informed choice for attending a university in the years 2018 to 2021. However, analysis of the QILT datashows that rankings are less reliable and so should not be used as measures of prospective university performance. This
has also been found for the various global rankings of universities. These results are based on Commission analysis of
unpublished QILT data on shares of students rating teaching quality as poor and excellent from 2017 to 2021.
106

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Kreitzer and Sweet-Cushman 2022; Stroebe 2020). Students claim to have learned more when they are
given cookies or chocolate in class (Hessler et al. 2018; Youmans and Jee 2007). Moreover, student
evaluations, even if using a valid instrument, suffer from high levels of inaccuracy: teachers are frequently
rated by students as poor when they are good (a false positive), or rated as good when they are poor inachieving good learning outcomes for students (Esarey and Valdes 2020).
Overall, all assessment tools have shortcomings, and even if QILT is not a perfect way of assessing aprovider’s performance, providers with lower ratings across a range of dimensions could treat these as red
flags for further investigation, as could students considering their choice of provider. It is also notable that
there are some fields where there are consistently low performance scores across all universities and withparticularly large deviations between them.107 This suggests possible attention to the teaching of some fields
more generally. The problems of survey bias and high false positives and negatives are greatest if test
results are used for assessing individual teachers, but as QILT is published at the field and institutional level,
inaccuracy is reduced through averaging, while bias is not such a problem if it is common across institutions.
Furthermore, as QILT relates to the overall experience of the student rather than an average of their classevaluations, it may be less affected by the biases of individual class evaluations described above.
There is scope for refining QILT by:• periodically re-validating the survey instrument. This would be achieved by surveying a sample of classes
using the existing QILT survey and an appropriate range of new questions that also probe quality and thenidentifying the questions (and their weights) that lead to the greatest correspondence to a ‘gold standard’measure of performance as given by independent expert assessment of quality. This the usual approachfor creating and validating psychometric and other similar screens. This could bring QILT results into
closer alignment with expert assessment, which given its costs, can only be sparingly applied.
• linking QILT to administrative data to provide a more comprehensive measure of employment outcomesover longer periods to supplement survey data on graduate outcomes.
Refinement should only go so far. In principle, it would be desirable for QILT to measure the value-added ofhigher education providers by controlling for student characteristics and other factors that might confound thelinks between teaching quality and outcomes. If feasible this would isolate the causal effect of provider
quality on students’ experiences, their dropout rates, and their acquired knowledge, skills, work-readinessand personal development (York, Gibson and Rankin 2019). However, attempts to measure learning gain
have generally stalled or been abandoned due to methodological flaws and high costs. The OECD ceased
work on the Assessment of Higher Education Learning Outcomes project (colloquially referred to as ‘higher
education PISA’) after governments withdrew support; the UK Office for Students has no further research
into learning gain planned after reports highlighted methodological issues; and Australian Government plans
to use the Collegiate Learning Assessment were dropped a decade ago (Coaldrake and Stedman 2016;
Office for Students 2018a). Coaldrake and Stedman (2016, p. 99) observed:
Unfortunately in practice we do not have standardised definitions of what students are supposed tolearn (and with constant changes in knowledge this is not a bug, it is a feature) and disentangling
the various factors that influence student learning is a formidable task. As a consequence, we haveto weigh very carefully the costs and benefits of seeking inevitably imperfect answers.
The academic who oversaw the UK’s ‘Learning gain pilot project’ commented more pithily that learning gain
is ‘Like dark matter, we know it’s out there, we just could not pin it down’ (Kandiko Howson 2022).

107 Based on QILT data for 2022 extracted from the Good Universities Guide.

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Boosting learning outcomes for tertiary students… and dissemination to students enhanced …
Regardless of the quality of any information on comparative provider performance, students need to be able
to access the information, interpret it well and use it to inform their choice about a provider or course. The
task for students is hard because of the confusing and contradictory set of performance measures promoted
by universities, various global rankings, and media. A major stumbling block is that all of the material iscurated by third parties who do not know what any given student expects from a course or subject (unlike
open source lectures, discussed above, which could provide a more direct line of sight).
The global and Australian evidence shows that university ranking and other third-party performancemeasures have a mixed impact on students’ choices. For example, in the United Kingdom, only 23% ofuniversity applicants in 2019 reported awareness of the Teaching Excellence Framework — a rating of
higher education providers’ teaching — and less than half of them used the ratings to inform their choice ofprovider (DfE and UCAS 2021). A Canadian study found students rarely consulted ranking publications,basing choice on information from peers and family (Milian and Rizk 2018).
The implication is that government and providers should raise student awareness of resources that can
inform better choices. For example, resources could be included prominently in career guidance and at thetime students enter their course preferences as part of the Universities Admissions Centre application
process. The Australian Government has taken steps to enhance informed decision making. Some of thedetailed data from QILT is accessible to prospective students through the ComparED website, which allows
potential students to search for a subject area, find all providers offering courses in that area, and viewsummarised QILT measures.108
However, ComparED enters a crowded space and competes with some other non-government-fundedsources of information (such as the Good Universities Guide — the GUG). The GUG publishes material oncourse availability and content, costs, careers, scholarships, open days, and a key set of QILT indicators. In
comparison, ComparED publishes a slightly more comprehensive set of QILT data, but does not provide any
broader information about providers.
Moreover, the guidance to students provided by ComparED may be misunderstood. For example, a person
wanting to know where to study applied econometrics will find high student satisfaction rates in
non-universities such as the Christian Heritage College (89%) and the Australian College of Physical
Education (88%). These are not the best places for obtaining the relevant skills compared with alternatives,
such as the notionally lowly-rated University of Melbourne (50%). The key problem is that the same
satisfaction rates are provided for all of the subjects in a broader study area (like business and management
studies), rather than shedding light on the capabilities of the provider in the specific areas of study of interest
to students. Business and management studies can include subjects as disparate and unrelated as actuarialstudies, sports administration and advertising and marketing communication.
ComparED should be adapted to address its ambiguous reporting. However, an alternative option would beto support the incorporation of the more comprehensive QILT data from ComparED into the GUG or othernon-government guides given their broad coverage of many other facets of providers relevant to informed
student decisions.
Some suggest displaying a single star rating prominently alongside qualification materials and at key decision
points to inform a wider base of potential students and to simplify choices. However, the more complex a
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There are some parallel issues for the VET system, previously highlighted by the Commission (PC 2020c, p. 211).
The study recommended addressing gaps in the availability of RTO-level information, including quality measures such as
graduate outcomes, student and employer satisfaction, and indicators of teaching quality. Reforms are underway.

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5-year Productivity Inquiry: From learning to growth Inquiry reportservice, the less meaningful are single simple metrics. A single star rating fails to consider the multiple domainsof performance that students care about, while applying fixed (and arbitrary) weights to multiple domains
ignores the variations in student preferences about them. Moreover, providers offer thousands of courses
across hundreds of subjects. This variety is too great to realistically and reliably use survey data to assess
performance. Yet students are interested in the area of proposed study, not averages across unrelated areas.
In any case, the methodological problems affecting QILT cast doubt on the validity of star ratings, a point also
raised by participants in the Productivity Commission’s roundtable on tertiary education.

… but ratings alone are not a strong motivator for improvement
Universities make some use of ratings. For example, good ratings are sometimes actively marketed to attract
students and ongoing poor student ratings of given courses will typically trigger some response. However,
the key question is whether universities improve their outcomes individually and whether there is someconvergence among them as ‘laggard’ universities seek to catch up to top performers. The more that low
QILT scores motivate university management in their own right to improve their performance (the ‘shame’factor), the more that scores should converge between universities.
However, there is no evidence of strong convergence in performance across most of the dimensions ofteaching performance, such as overall satisfaction, teacher quality, course relevance, and intellectual
stimulation of students.109 From 2017 to 2021, most higher-performing universities remained top-performers,
while most lower-performing universities stayed in the bottom part of the distribution (figure 4.3).110

Drilling down to the level of the teacher and the lecture room
QILT does not seek information on the performance of any given teacher, which is the level where
behavioural change is most desirable. Instead, higher education providers seek information on individual
teacher performance through their own student evaluation surveys. Low student response rates often affecttheir usefulness for feedback to teachers and faculty leaders. This also means that the results are too
unreliable to release to prospective students and, given non-uniformity in survey questionnaires acrossproviders, such information cannot be used to compare teaching outcomes across them. They are alsoafflicted by all the concerns raised above about the bias, validity and accuracy of student evaluations, and toa greater extent than QILT because results are not averaged. The greatest value of student evaluations may
be as a screening test for subsequent, more accurate review by colleagues or in promoting criticalself-reflection, rather than as a basis for ‘disciplining’ notionally poor teachers.
There are alternatives to student appraisal that provide better insights into individual teacher anddepartmental teaching quality. In particular, direct observation of the performance of teachers by their peers
or by external independent parties can avoid some of the biases that arise from surveys and the risks thatstudents respond to irrelevant aspects of course delivery (the ‘chocolate cookie’ effect) or those with poor
grades mark down their teachers. When accompanied by training of assessors, direct observation allows theconsistent and considered application of a common assessment framework.

109 Convergence is measured by so-called -convergence which is the trend in the coefficient of variation (or the

standard deviation divided by the mean) across ratings by university from 2017 to 2021.
110 On the positive side, the share of students who rated teaching quality as ‘poor’ fell from 2017 to 2021 for 80% of
universities, albeit by a small amount (mostly by about 0.2 to 0.3 percentage points from base levels of about 3.5%).
Equally, most universities (almost 70%) demonstrated an increase in the share of students rating teaching quality as‘excellent’, although again by a relatively small margin compared with base levels.
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Figure 4.3 – The good stay good, the mediocre stay mediocrea
Universities with the highest and lowest shares of students saying overall quality is‘excellent’ 2017 to 2021
2017

2021
5th quintile (worst)

38% of theworst stayworst

4th quintile

Worst
3rd quintile

2nd quintileBest
1st quintile (best)
75% of thebest stay
best

a. In the QILT survey, overall university satisfaction can be classified as ‘poor’, ‘fair’, ‘good’ or ‘excellent’. Considering
only the distribution of the share students responding ‘excellent’ — the ‘worst’ universities are those with the lowest shareof students (20th percentile and lower) saying overall university satisfaction levels are ‘excellent’ in 2017, while the ‘best’
include universities that have the highest share of students (80th percentile and higher) saying that overall university
satisfaction is ‘excellent’ in 2017.
Source: Productivity Commission analysis of unpublished QILT data.

Peer review comes in many flavours — different methods, assessors and purposes (Johnston, Baik andChester 2022). For instance, formative peer review relies on observation and appraisal of teacher practices bycolleagues, and diffusion of best practice among them. Formative assessment has the value that both thereviewer and the reviewed benefit from the process (WSU 2020, p. 13). It is more closely related to coaching.
In contrast, summative review is undertaken by an external party or a senior academic, often as part of aprocess for determining ongoing employment or promotion, although it too may have formative elements.
Summative review may prompt improvement in teaching to avoid the consequences of an adverse review but
is non-co-operative by nature and risks greater resistance by academics than co-operative models. Some
universities have ceased summative assessment, such as the University of New South Wales (UNSW 2023).
Many Australian universities have active formative assessment peer reviews, although it appears these canbe voluntary and vary in their rigor. There are grounds for an agency (discussed further below) to undertakea rapid review of the use of formative and summative review processes in higher education institutions andto encourage their development where needed.
While peer review is often an internal matter, there is also scope for complementary centralised reviews
undertaken by a single agency. Such reviews can provide comparable indicators across different providers
and subjects, and avoid any collegiate bias in assessments at the departmental level. However, fullsubject-level review is costly and administratively burdensome, requiring experts in each field and significant
time. A program in England during the 1990s proved costly and may have been gamed (box 4.1).
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5-year Productivity Inquiry: From learning to growth Inquiry reportBox 4.1 – Case study: England’s comprehensive subject review
The most comprehensive higher education subject review ran from 1993 to 2001 in England and Northern
Ireland. The Quality Assurance Agency for Higher Education conducted subject-level reviews
encompassing ‘sub-degrees’ to PhDs, and covered all departments at all higher education providers. Its
two main goals were to ensure that teaching in the sector was of a satisfactory quality and to encourage
further improvements. It did so by tying review results to funding outcomes.
Subject reviews were conducted by teams of at least three subject specialists and a review chair. Subject
specialists were largely academics, although in some cases industry professionals were also included. All
specialists received training before site visits. These visits lasted three to four days, and included meetings
with subject staff, students, graduates and employers. They also included observing teaching and learningand reviewing samples of assessed student work.
Over its seven cycles, 2904 review reports were published. If a department received any inadequate grades,
its subjects would be re-reviewed within a year. A further low grade at re-review could result in the partial orcomplete withdrawal of funding. Over its lifetime ‘the overwhelming majority (99%) of subject review visits
resulted in the provision being approved in the first instance’ (p. 4). There was only one instance of a failed
re-review (QAA 2003). Where there was improvement in outcomes, it was difficult to determine whether thisreflected genuine quality improvement or learning to game the system (Cook, Butcher and Raeside 2007).
The program was replaced with a lighter-touch system in the early 2000s, owing in part to its public cost
and the overhead burden to institutions. The ‘institutional audit’ system disentangled review from funding
under the assumption that the comprehensive review program had made institutions’ internal quality
assurance procedures more robust and hence more appropriate for the government to rely on. The
institutional audit system was itself replaced in 2011. Quality assurance processes in England underwent
several changes with the regulatory power of the Quality Assurance Agency diminishing over time.

Lighter-touch assessments of quality at the provider rather than course level are more attractive. For
example, in Scotland, a central agency appoints a team of staff and students to review a subset of providers
on a five-yearly basis. The review’s primary focus is whether the institution as a whole has effective
arrangements for ‘enhancing the quality of the student learning experience and for securing the academic
standards of its awards’ (QAA Scotland 2017, p. 14). The team determines this through meetings with staff
and students. Individual review outcome reports are published along with thematic reports that collate
findings from each review cycle about industry-wide trends and areas for development. Each institution must
report a year later on how recommendations have been implemented.
The Australian Government should consider emulating these lighter touch approaches to spur continuous
improvement across the sector, although the exact design of the arrangements would need to consider:• the type and depth of assessment needed to effectively appraise teaching. For example, a centralisedmechanism could involve observation, interviews, sampling of exam papers or external assessment of students• the unit of assessment. For example, review at a subject level is likely to be most useful, particularly
given the trend of providers allowing students to stack subjects to build their own degrees. However, thisis also likely to be more costly• administrative burdens on already encumbered teaching staff. Rolling or randomised targeting of specificinstitutions or subjects each year would reduce burdens by limiting the frequency with which a given faculty or

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school is reviewed (for example, to every 5–10 years). Limiting the depth of reviews by taking sub-samples ofassessments or externally assessing smaller random samples of students would also lower costs• the dangers of biased assessments. A process for peer review of exams or assessments could bebased on the double-blind approach used for research review to eliminate bias (although full anonymity
may be challenging for smaller fields of study)• who undertakes assessments, including the roles for academics, industry experts and students insupporting the assessment process• the consequences where teaching quality is found to be poor. This could include requirements toinitiate processes to remedy faults with re-assessment after an agreed period or, in extreme cases, theremoval of course accreditation by TEQSA.
While TEQSA’s current role is ensuring minimum standards, its remit (and funding) should be expanded tooversight these review processes, giving it a more active role in improving quality even among higher performers.

Recommendation 8.9
Leverage information to improve quality
The Australian Government should:• increase the transparency of teaching performance by requiring universities to provide all lectures
online and for free
• refine and validate new Quality Indicators for Learning and Teaching (QILT), and use these and otherdata to develop and publish more meaningful indicators of tertiary teaching quality and performance• adapt the ComparED tool to address the risk that students may misunderstand its information andconsider the option of abandoning it and providing additional QILT data to non-government fundedwebsites that cover many other aspects of higher education providers relevant to student choice• give the Tertiary Education Quality and Standards Agency (TEQSA) the responsibility to undertake
external university teaching quality assurance review processes akin to those applied by the Quality
Assurance Agency (Scotland).

4.3

Rewarding and spreading best practice teaching

There is little evidence that the higher education system is systematically failing to provide adequate training,but equally, universities and their staff have mixed incentives to perform their teaching function well and asignificant minority of students say that many aspects of their training are only of poor or mediocre quality(appendix A). Given the pre-eminent and increasing role of higher education in raising the skills of new
generations of Australians, improving the effectiveness of teachers in imparting skills has high potential
productivity and social benefits (chapter 1).

Professionalising the tertiary workforce
School teachers are required to undertake years of training and professional development, and aresupported by a range of institutions to fulfill their professional role. Professionalising the teaching role intertiary education is, by contrast, in its infancy. Notwithstanding that higher education providers implement
various strategies to improve teaching and promote collaborative peer review, there is uncertainty about thesophistication and resourcing of these strategies and the extent of take up by teachers. At least a few years
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5-year Productivity Inquiry: From learning to growth Inquiry reportago, the answer was not much (Norton, Sonnemann and Cherastidtham 2013). While comparable
contemporary data are not available, other survey evidence suggests that higher education teachers do not
get strong support in any of their functions (Christian et al. 2021).

Enhance capabilities
One avenue is to strengthen the capabilities of universities in offering support. Establishing a trusted evidencebase about how to support high quality teaching and diffusing its lessons is one step (recommendations 8.9
and 8.11), as would be greater recognition of the value of the best teachers. Moreover, TEQSA should assess
whether universities are making sufficient investments in the creation and use of, high quality, tailored
professional development courses and materials for supporting teaching excellence, and if not, engage with
universities to ensure this occurs, with encouragement of a collaborative approach between universities. AERO
would contribute advice about what constitutes quality material (as discussed further below).

Research funding rewards for excellent teachers
Rewards, whether pecuniary or not, create incentives to perform better. But the form of the ‘carrot’ matters.
Notwithstanding enduring controversy over its effectiveness, there is at least some evidence fromcomprehensive meta-analysis that performance-based salary bonuses in school settings can improveoutcomes, although its cost effectiveness and impact on student outcomes is context-dependent (Pham,
Nguyen and Springer 2021).
However, there is no evidence base to assess the likely impact in a higher education setting, which, in any
case, involves some additional complexities compared with schools. In particular, while quality school
teaching is also hard to define, there is a greater capacity to monitor teacher practices and outcomesthrough standardised tests, which provide a more reliable benchmark for comparing performance. The
problems plaguing student evaluation tests and the absence of standardised tests amplifies the difficulties ofbonuses in higher education. At this stage, it would be risky for the Australian Government to fund or require
performance-based pay for higher education teachers. This is especially so given that one of the mostprospective avenues for raising teacher quality in higher education is the greater use of formative and peer
assessment, which is based on co-operation rather than competition between educators.
Nevertheless, a different type of carrot may prompt improvements without the problems of pay bonuses.
Awards for excellence are one, and have a strong evidence backing for their effectiveness (Frey and
Gallus 2017a, 2017b). They can reinforce intrinsic motivations, encourage loyalty to the mission of theorganisation, and can have bigger effects on performance than pay increases when the recipient’s
performance is hard to accurately monitor (though to work well, there has to be integrity to the process of
bestowing the award to reduce debates about the merits of the choices). Standard academic awards arecommonly used throughout the sector. Their profile and impact would be raised if they were used as asource of evidence for best practice (recommendation 8.11) and potentially, if more of them were given.111
Linking awards to modest research funding for the award winner also looks to be a promising additional
incentive. The Griffith Business School developed a Teaching Excellence Recognition Scheme (TERS) in
2014 that was explicitly designed to strengthen incentives for academics to invest in teaching (Berry andGuest 2018). Under this scheme, staff are recognised for their teaching excellence (drawing on a range ofmeasures including student assessment, participation in peer evaluation, demonstrated innovation inteaching, and professional development among others) and then given funding for academic purposes (such
111 One academic noted that in his institution, about one quarter of staff showed high levels of teaching performance, but

at the rate at which awards were given out, might have to wait up to 25 years to be recognised (Berry and Guest 2018).
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as for research or development of training resources). The scheme provides modest funding for a few
candidates rather than providing a single ‘winner takes all’ prize, so motivating performance across moststaff. A unique benefit of this model is that it combines the prestige of research with the teaching function.
Canada has a range of small grants, which vary in their generosity and eligibility, but have similar features
and aspirations to the TERS. The evidence suggests that the grants enhance the skills of recipients and leadto high-quality research (Hum, Amundsen and Emmioglu 2015).
There are compelling grounds for wider adoption of such micro-grants.

A new short-term grant to promote primary research into teaching
ARC grants usually provide for three to five years of funding for eligible projects, which is not suited to
exploratory and short-term research into academic teaching excellence.
Accordingly, a complementary approach would be to create a modestly funded competitive grants scheme
for shorter term projects of 6 months to one year into teaching excellence that academics could slot into theircareer plans without long commitments to research in this area. Such grants would necessarily involve lesscompliance burden than existing grants to justify the application costs for academics. A sequence ofshort-term grants for research by different scholars into teaching excellence would provide for thedevelopment of a body of evidence about teaching skills and the likely enhancement of the teaching skills of
the researchers themselves. The evidence from an increasingly large group of researchers would feed into
the relevant institutions’ practices and would also be disseminated by AERO (recommendation 8.11).
A prime benefit of such an initiative would be to help professionalise teaching as a function in a university as
professions are typically characterised by the acquisition and application of expert skills, and such researchwould establish and legitimise the relevant skills. Success in competitive grants confers prestige on both theresearcher and on the area subject to research. This halo effect would be amplified because universities
tend to compete on their success in receiving ARC grants more generally, and so their relative success forthis tranche of grants would also be a signal of their capability in this area of expertise.
The modest funding required for such grants could either come from the existing ARC funding pool or be
supplementary, depending on government budget constraints. Given its novelty, a trial would be prudent.

Recommendation 8.10
Professionalise the teaching role
The Australian Government should bolster the incentives for, and prestige of, higher educationteaching by:• facilitating trials of additional funding for undertaking research and teaching development provided toindividual staff based on their teaching performance, drawing on the Griffith Business School’s
Teaching Excellence Recognition Scheme (TERS)• trialling a modest Australian Research Council Grant that provides funding for teaching focusedresearch for 6 months to a year
• enhancing preparation for higher education teaching, informed by the evidence collected by initiatives
outlined in recommendations 8.9 and 8.11.

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Learning about learning
While there are some academic centres for research into tertiary education teaching,112 pedagogical researchin tertiary education and clear guidance about best-practice is less developed compared with the school sector.
Nevertheless, there is good evidence about the value of pedagogical training of higher education teachers(Chalmers and Gardiner 2015; Postareff, Lindblom-Ylänne and Nevgi 2007; Vilppu et al. 2019), which withsynthesis and further research would provide better guidance about how to teach post-school students.
There is no body in Australia charged with synthesising and undertaking research into post-school teaching,promoting teaching excellence or sharing lessons about improving teaching quality in the tertiary education
sector. The former Office for Learning and Teaching, which was responsible for supporting and incentivising
effective teaching and encouraging innovation, was defunded in the 2016-17 Budget. In contrast, following
the creation of AERO, there has been a renewed effort to create and diffuse an evidence base for excellencein early childhood and school teaching.
The differences between desirable teaching practices in school, VET and higher education have narrowed
as the higher education system has shifted from an elite-only system to the primary destination of a far morediverse group of students. In any case, the process of learning does not radically change in one year as a
student transitions from school to subsequent training.
Given the complementarity between teaching in all parts of Australia’s education system, AERO should
assume a broader role in developing an evidence base for all types of teaching, making it accessible tousers and encouraging adoption and use of the evidence in teaching and education policy. Commensurate
additional funding would be required for AERO to exercise this role.
In undertaking that role, one (of many) potentially useful sources of information for AERO would be any
lessons from the Australian Government’s Australian Awards for University Teaching. There appears to be
little attempt to document and distribute the lessons from awardees’ success to other academics throughout
Australia or to exploit the observed practices of high-quality teachers as an evidence base. An added
advantage of systematically examining awardee practices is that it also adds status to the role of teaching.
A question is whether AERO’s remit should go further to include coordination of pilots of pedagogicalpractice across a sample of providers to evaluate what works best in different contexts. This would represent
a significant shift in AERO’s function and expertise though that should not ultimately rule it out. However, inthe medium term, the highest dividends will probably emerge from synthesising best practice from theexisting Australian and global evidence base, noting that there are other avenues for primary research about
effective tertiary teaching (such as ARC grants and the National Priorities Pool Program).

112 For instance, the University of Queensland Institute for Teaching and Learning Innovation, the Melbourne Centre for

the Study of Higher Education, and the National Centre for Student Equity in Higher Education.
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Recommendation 8.11
Develop an Australian evidence base
The Australian Government should extend the role of the Australian Education Research Organisation(AERO) to the collection and dissemination of evidence on best practice post-school teaching, coveringboth VET and higher education. As part of this new role, AERO should also:• draw on the lessons from the teaching practices of awardees of the Australian Government’s AustralianAwards for University Teaching• undertake a rapid review of the use of formative and summative review processes and professional
development initiatives in higher education institutions.

Treading cautiously with financial rewards and penalties
In principle, financially penalising or rewarding providers based on performance creates incentives for themto lift the quality of their courses, resourcing and teaching staff. The Australian Government introduced aperformance-based funding (PBF) scheme in 2020 that linked funding incentives to four measures(table 4.1). The scheme was put on hold due to COVID-19, although it is scheduled to re-commence.
Previous PBF schemes in education have proven problematic in Australia and globally, including
encouraging gaming (such as enrolling fewer students from groups less likely to perform well), lack ofimpact, and unfairness.
• The most significant Australian PBF scheme was the Learning and Teaching Performance Fund, which
overwhelmingly rewarded universities that were able to attract better-performing students. In 2006, 63% offunding went to the Group of Eight and 0% to the Australian Technology Network of Universities despite
the two groups serving similar numbers of students. In later years these disparities were reduced, but still
remained very large (Harvey, Cakitaki and Brett 2018).
• Most US states and many European countries also have PBF. Systematic reviews and a meta-analysis of
US schemes have generally found no effects on graduation rates, the metric targeted by these schemes,
but often found decreases in participation by racial minority and low-SES students (Kivistö andKohtamaki 2015; Li 2021; Ortagus, Kelchen, Rosinger & Voorhees 2020).
The PBF model introduced in Australia in 2020 was designed to avoid some of the pitfalls experienced bysimilar schemes overseas. For instance, rewards for increasing access to equity groups, such as Aboriginal
and Torres Strait Islander students, account for the desirability of a more inclusive higher education system.
The approach reflects some desirable features for such a scheme previously outlined by the Productivity
Commission in Shifting the Dial, such as incorporating student-reported experience and outcome measuresand differentiating by student type and discipline (PC 2017c, p. 35).

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Table 4.1 – Performance-based funding metrics and weightingsa
MetricWeight

How is it measured?

How is it assessed?

Graduate

40%

The overall graduate employment rate four to six months

A university’s performance

employment

after graduation for domestic bachelor students based on

against its own 5-year average.

outcomes

QILT data, adjusted for local employment rates.

Student

20%

satisfaction
Student

quality based on QILT data, adjusted by study area.
20%

success

Equity group

Domestic bachelor student satisfaction with teaching

20%

participation

Attrition rates adjusted for students moving

A university’s performanceproviders/courses, and controlling for some factors

against its predicted outcomesthat influence attrition: full/part-time study, mode ofafter controlling for the listed

attendance, entry basis, field of education, and age.

factors.

Participation of Aboriginal and Torres Strait Islander,

A university’s equity grouplow-SES and regional students.

participation rates compared withsector averages.ba. Funding is allocated based on incremental bands within each outcome metric category. Universities receive 100% of
the total for high performance, down to 80% and then 60% for poor performance. There is further scope for the lowest
band to be ratcheted down gradually where a university performs poorly year-on-year. b. For regional and Aboriginal andTorres Strait Islander students, participation at over one half of the sector average is sufficient for full funding, for
low-SES students participation at greater than one standard deviation below the sector average is sufficient.
Source: DESE (2021c).

Nonetheless, PBF in its current form is not likely to achieve its objectives, and the prospect that moresophisticated versions will address its deficiencies is uncertain. QILT is a useful tool, but its flaws suggestthat providers should not be penalised based on differences in their scores (and it is not clear why teachingquality is the only domain of experience that counts). Controlling for local labour conditions alone is not
sufficient to isolate the effect of providers on employment outcomes. In any case, even more sophisticatedmodels that control for other factors do not look sufficiently reliable. As discussed in section 4.1 andappendix A, even after accounting for a range of confounding factors, variations in labour market outcomescannot reliably be attributed to the efforts of providers, and using outcomes only four to six months after
completion ignores that outcome variations between universities can be reversed after longer periods. Equity
group participation is a desirable goal, but will only partly be under the control of individual providers,
especially as governments play a central role in encouraging such participation and retention through various
funding and outreach programs. Further, it may be appropriate for different providers to have different
enrolment rates of equity groups as their course offerings, vocational orientation and demographic
catchments vary. Penalties for attrition rates ignore the desirability of dropping out for some students andalso pose the risk that providers may ‘mark easily’ to reduce their financial risks.
There are possible alternative incentive mechanisms to PBF, including making universities liable for part ofstudents’ HELP debt or withholding part of CGS funding until a student completes their degree (PC 2017a,
p. 107). But these have similar or other problems that suggest they too should be treated with caution.113

113 Both measures have similar drawbacks associated with attribution and would have a much greater time lag than current

PBF arrangements, which blunts the incentives to improve relative to the PBF scheme. HELP debts take 7–10 years to be paid
off on average (DESE 2021b), while students frequently take 6–9 years to complete their degree (DESE nd), meaning
universities could be out of pocket for investments in quality improvements for years until they pay off. ‘Completion bonuses’
also serve the same purpose as including attrition as a metric in PBF, which explains over 90% of the variation in completion
rates between universities and is far more timely (Wellings et al. 2019).
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Possibly the lowest-risk option for using financial incentives to encourage higher quality teaching are modest
rewards for providers that are identified as making genuine and successful efforts to improve and use
formative assessment tools and professional development. Rewards for inputs are often inefficient, but ifthey are likely to be causally related to outcomes and if it is easy to measure their uptake, then this approach
can be superior to rewards for outcomes that cannot reliably be attributed to the provider.
Furthermore, a return to a demand-driven system acts as a de facto performance-based funding model asproviders who can successfully signal their quality will be rewarded through additional enrolments andrevenue (chapter 3).

Recommendation 8.12
Favour light-handed and simple incentives over performance-based funding
The Australian Government should:• put on hold the scheduled commencement of performance-based funding of universities in 2024 andonly reinstitute if its risks are better managed and if other approaches to improving the performance ofuniversities have proved ineffective• explore the option of financial rewards to higher education providers that AERO identifies as having
made successful efforts to improve and use formative assessment tools and professional development(drawing on recommendation 8.11).

4.4

Supporting retention and completion

Completion of valuable training, not enrolment, is the goal of education. While non-completers can acquire
skills and will often still get jobs, completers tend to get better outcomes. This applies to both universities(PC 2019, p. 47) and VET (NCVER 2021c).
However, defining an ‘optimal’ level of completion is difficult because some level of attrition is inevitable, canbe beneficial and can reflect factors beyond the control of providers:
Factors affecting an individual’s completion are complex and can include the level of support fromteachers and the institution, course content, course satisfaction, and the student’s own
expectations and personal circumstances. Institutions can influence some, but not all, of thesefactors to produce a more favourable outcome. On the other hand, some level of attrition must be
expected and should be accepted. (Bradley et al. 2008, p. 19)
In 2019, the most frequently cited reasons for considering early departure from university were dominated bypersonal circumstances that largely lie outside the control of providers: ‘health or stress’ (46%), ‘need to do
paid work’ (27%) or ‘need a break’ (24%) (SRC 2022c). However, others cited reasons related to theirlearning and teaching experience, such as ‘workload difficulties’ (25%), ‘expectations not met’ (22%) or‘academic support’ (19%).
VET non-completers overwhelmingly cite employment-related reasons for leaving study. The most commonof these are: leaving one’s job or changing career, being made redundant, and having poor relations with
their manager or workmates. In 2019, 73% of non-completers cited employment-related reasons, faroutstripping the share who cited training-related reasons (11%), such as lack of support or being unhappy
with the training (NCVER 2020).
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The right pathway therefore depends on each student’s individual circumstances. Giving students the best
chance to follow through with their individual goals — whether this means completing their studies or having
a go and dropping out swiftly — can help improve the efficiency and productivity of the tertiary sector.

Risk of non-completion is unevenly spread
Some students and institutions exhibit greater non-completion risk. For universities, equity group students —those from low-SES backgrounds, from remote areas or of Aboriginal and Torres Strait Islander descent —have below-average completion rates within six years of starting a degree (figure 4.4). And the share notcompleting has increased in recent years, particularly for low-SES and remote students. This partly reflectsthat the demand-driven system intended to encourage greater enrolments even though providing more
opportunity involved a higher risk of non-completion (PC 2019, p. 9).
Lower university completion rates are also observed among part-time students, entrants with ATARs below 70
and those studying externally (that is, off campus or online); completion rates for these groups are very low andcomparable to some equity groups. Students in these groups represent a sizeable proportion of the student
population: in 2020, external students and part-time students represented 33% and 34% of the commencing
domestic student body, respectively. In comparison, low-SES students, the largest equity group withbelow-average completion rates, comprised 19% of commencing students in 2020 (DESE 2022b). Persistently
low completion rates among these non-equity student groups hints at structural factors that make completingan undergraduate degree more difficult for these students. Risks of non-completion are compounded where
there are intersections between these groups and equity status (Edwards and McMillan 2015).
Non-completion also varies by institution. A student’s choice of institution has the most influence over theirchance of attrition, outweighing other student-level factors such as attendance type (part- or full-time), study
mode, and equity group status (HESP 2017). Other evidence found similar variations in dropout rates acrossproviders (Cherastidtham and Norton 2018). Institutions with smaller student populations and low levels ofsenior academic staff also have higher first-year attrition rates (TEQSA 2017a). Such variance may reflect
institutional-level differences in teaching quality and other capabilities (section 4.1).
By contrast, VET completion rates have been steadily increasing, and this trend has been reflected acrossequity groups. Completion rates for students with disability, from very remote locations and Aboriginal andTorres Strait Islander students have all increased over the past decade (PC 2020c). This may be attributed
to better targeting of qualifications and skill sets or improved quality of delivery, such that a larger share of
students complete only the components of a qualification they really need.
Completion rates also differ by provider type. Those training with an enterprise provider114 are much more
likely to complete their qualification than their peers, particularly students at TAFE (NCVER 2021b).
However, this may be explained by differences in student mix. The average student attending an enterpriseprovider is older and of a higher socioeconomic status than those at TAFE (PC 2020c) — two characteristics
that improve the likelihood of completing their VET qualification (McVicar and Tabasso 2016).

114 A company accredited to deliver qualifications to its own workers, whose primary business is not the delivery of

training and development.
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Boosting learning outcomes for tertiary students

Figure 4.4 – Degree completion rates are below average for several equity andnon-equity student groupsa,bCompletion rates for bachelor degrees within six years, by student groups
70
65
Total
domestic

Completion rates (%)

60
55

Low SES50<70 ATAR
Remote45
Indigenous

40

External
Part-time

35
30
2005

2006

2007

2008

2009
2010
2011
Commencement year

2012

2013

2014

2015

a. The completed course may not necessarily be the same course that the student initially enrolled in. For example, a
student may have commenced a science degree but completed an arts degree; or commenced study at one institution,
but completed at another. Low SES is measured as the bottom 25% of Socio-Economic Indexes For Areas (SEIFA).
SEIFA scores are produced by the ABS and rank areas in Australia according to relative socio-economic advantage anddisadvantage. b. While part-time students would be expected to complete their courses more slowly, they are still
significantly less likely to complete a degree even after 9 years.
Source: DESE (2022a).

Understanding the determinants of non-completion is an important step to supporting optimal completion
rates. The variations among different student cohorts and providers suggest that providers could learn fromeach other about the best ways to lift completion rates for students at greater risk of non-completion.

Improving completion for equity groups continues to be important …
Education policy for equity groups aims to promote enrolment in tertiary education and increase thelikelihood that an enrolled student completes their studies. Addressing these challenges ensures thatstudents who face disadvantage can benefit from tertiary education and helps eliminate structural inequities.
In response to these challenges, the Indigenous, Regional and Low-SES Attainment Fund (IRLSAF)
combines several pre-existing funding arrangements designed to support equity students.115
As part of the IRLSAF, the Higher Education Participation and Partnerships Program (HEPPP) provides funding
to universities to implement strategies that improve access to undergraduate courses for identified equity groups,

115 Specifically, this includes people from regional and remote Australia, low-SES backgrounds, and those of Aboriginal

and Torres Strait Islander descent.
1195-year Productivity Inquiry: From learning to growth Inquiry report

and to support retention and completion for these groups. There is some evidence at an individual program levelthat HEPPP initiatives have improved outcomes (for example, NCSEHE 2017; Zacharias et al. 2016). However,given other factors influencing completion rates, it is challenging to assess the causal effect of the HEPPP on
completion rates, which remain stubbornly high for equity groups. An evaluation of the HEPPP cautiously
concluded that there was evidence it contributed to improvements in student outcomes, but that the extent of the
impact could not be quantified with available data (ACIL Allen Consulting 2017).
Part of the challenge in identifying the effectiveness of the HEPPP is its concurrent operation with thedemand-driven funding system. Indeed, demand-driven funding was accompanied by additional HEPPP
funding to universities in proportion to the number of students they enrolled from equity groups, in part to meetthe cost of additional support needed to allow some students to succeed. The Productivity Commission found:
Universities choose how to deploy these funds and in practice it supports a myriad of different
programs. Their efficacy has not been evaluated at a program level. This study at a system level
at least suggests two hypotheses: that the additional funding has been used ineffectively; or that it
has proved insufficient to meet the needs of students from disadvantaged backgrounds. Possibly
both hypotheses are true. (PC 2019, p. 69)
Supporting access and retention of equity students remains a priority. For Aboriginal and Torres Strait
Islander students, the National Agreement on Closing the Gap has set a target of 70% of Aboriginal andTorres Strait Islander people between the ages of 25 and 34 to attain a Certificate III or above by 2031.
While progress has been made to meet this gap, increasing from an attainment rate of 19% in 2001 to 42%
in 2016, there is still some way to go to meet the target (PC 2022).
But equity education policy has continued to develop. Regional University Centres, which provide facilities
and support to students studying in remote areas have been successful (Country Universities Centre,
sub. 119), with eight more Centres to be opened in 2023. Further, there have since been efforts to improvethe evidence base for initiatives funded under the HEPPP. A new Student Equity in Higher Education
Evaluation Framework was designed to share lessons across the sector about equity activities that workthrough three levels of evaluation:• overall national program evaluation of the HEPPP and its outcomes• quality improvement evaluations of HEPPP-funded projects• evaluations of the effectiveness and impact of HEPPP-funded projects (Robinson et al. 2021).
This process has yet to commence but represents a positive move toward ensuring that HEPPP funding istargeted at initiatives that have the greatest impact on objective outcomes, such as student completion rates.

… but more could be done to support non-equity students to complete
The HEPPP should remain focused on equity groups. Extending its purpose beyond Aboriginal and Torres
Strait Islander, low SES and remote students would dull the incentive for providers to target funding toward
equity group access and completion.
However, there is merit in extending new measures that support retention beyond equity groups to otherswith elevated risk of non-completion. As the share of the population accessing tertiary education grows,
effective supports will become increasingly important for a wider range of students. Indeed, many of thosebelonging to equity groups study part-time or externally (Edwards and McMillan 2015). But this overlap does
not always apply and may diminish over time. The share of external students, for example, has grownthrough the past 5 years, with more undergraduates opting to learn externally while internal student numbers
continue to decline (DESE 2022f). Student support and resources will need to accommodate thesedemographic changes and the challenges they bring to students’ preparedness for higher education.
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While group affiliation will still inform the types of support measures appropriate (for example, culturally safeinterventions for Aboriginal and Torres Strait Islander students), providers should be able to test newmeasures to screen students, identify those specifically at risk and provide support. A combination of many
approaches is likely to be needed across the sector given the unique characteristics and needs of individual
students and providers (box 4.2). In some cases, this may simply require earlier intervention to engage
struggling students with existing support services. Subject coordinators could include links to tutoring
services on the subject’s webpage, or ensure that students who fail the first assessment attend a mandatory
meeting with their subject tutor. In other cases, novel approaches may be required.

Box 4.2 – Specific measures to improve support for students
The Productivity Commission has made several recommendations in recent reviews aimed at improving
supports for tertiary students which remain relevant.
Better mental health supports for tertiary students
The Mental Health Inquiry recommended strengthening accountability of tertiary providers with expanded
mental health support, including:• expanding online mental health support and collecting de-identified data to inform service improvement• ensuring international students are adequately covered for mental health treatment and counselling
services meet language and cultural diversity needs• requiring all tertiary providers to have a mental health and wellbeing strategy as a part of registration• the development by the Australian Government of guidance for non-university higher education
providers and VET providers on how they can best meet student mental health needs• monitoring and disseminating information on best practice interventions by TEQSA and ASQA.
Better supports for apprentices and other VET students
The review of the Skills and Workforce Development Agreement identified several gaps in support forapprenticeships and recommended:• screening apprentices to improve completion rates, and identify needs for support services, and if
found to be cost effective, extending this to all VET students• improving apprenticeship support services through more co-operative contracting arrangements, andexpanding services to areas of unmet need.
Source: PC (2020b, p. 254); PC (2020c, pp. 346, 354).

Programs found to be successful should be replicated throughout the sector, although determining program
success has proved difficult. Program evaluation across the sector is piecemeal, but there are instanceswhere evaluations have identified positive initiatives, which have then been adopted more widely. The
National Centre for Student Equity in Higher Education (NCSEHE) recently funded an internal evaluation of
the Victoria University Block Model, which found significant reductions in failure rates (Jackson, Tangalakis
and Solomonides 2022). This has led other universities, including Southern Cross and Murdoch, to introduce
their own versions of the block model.

1215-year Productivity Inquiry: From learning to growth Inquiry reportTEQSA (2020) has developed a Good Practice Note to share institutional retention strategies and lift performancein this area.116 However, while it identified 29 ‘good practice’ examples, TEQSA has had to rely on a thin evidencebase and acknowledged that ‘many providers have difficulty demonstrating whether particular initiatives haveworked’ (p. 5). Some simply cite a correlation between having the program in place and generally high retention
rates at an institution level. Others present survey evidence that students reported feeling positive about theexperience or reported improved satisfaction, without demonstrating any effect on retention.
TEQSA notes that further exploration is needed into the structural factors that limit part-time and external
students’ likelihood of completion. This goal can only be realised if there is sufficiently reliable evidence on
cost-effective support measures. Evaluations of retention programs should use a robust strategy for
identifying program effects and measuring objective outcomes to enable cross-program comparison(box 4.3). They should also be made publicly available where feasible.
In the lead up to the Student Equity in Higher Education Evaluation Framework, several reviews
recommended a central clearinghouse to support dissemination of evidence about effective equity initiatives(Bennett et al. 2015, p. 9). This could be broadened to encompass retention strategies that target all
students (both equity and non-equity) at higher risk of non-completion in all tertiary settings.
Developing an evidence base and improving outcomes will first require providers to invest in interventions.
Absent sufficient incentives to further expand and innovate in providing student support, providers may be
unwilling to experiment with new retention programs.
Extending a grant to higher education providers aimed specifically at retention and completion can reduce
this unwillingness. Providers would apply to the Department of Education for funding, outlining the specifics
and the expected impact of their proposed initiative. Universities would be able to apply for funding annually(depending on the initiative, the grant could be for more than one year). Given the high number of externaland part-time students, experimentation with a large cohort will likely yield more robust results. Pairing thiswith a sector-wide evidence base will ensure that programs can be evaluated within their contexts andapplied by other institutions where viable.

Not pushing retention at all costs
Some students may benefit from support to exit quickly if a course does not suit them. Not completing aqualification, or taking excessively long to do so, incurs costs for students (forgone earnings from a job,spending on course material, and course fees or accrued debt) and taxpayers (given governments subsidise
tertiary education).
‘Debt and regret’ appear to be commonplace among university non-completers:• almost 40% would not begin their degree again knowing what they know after dropping out• about one third believe they received no benefits from their course• nearly two thirds believe they would have been better off if they had finished (Norton and
Cherastidtham 2018).

116 Institution retention strategies and TEQSA guidance on good practice both stem from recommendations in the Higher

Education Standards Panel review on Improving Completion, Retention and Success in Higher Education (HESP 2017).
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Boosting learning outcomes for tertiary students

Box 4.3 – Good practice evaluations are needed for an optimal retention program
Evaluation of support programs involve many practical and methodological challenges, including a clear
framework for determining whether a program causes an outcome, ethics clearance and adequate data.
Where a survey is used as a component of an evaluation, another wide range of considerations are atplay: identification of unbiased sample frames; recruitment of respondents, stratification and weighting
strategies; questionnaire design and piloting; interview training; and non-response follow-up approaches.
Often, evaluations only assess how responding students view a program, which provides minimal
guidance to universities.
A well-designed program can profoundly improve student outcomes. For example, an evaluation of the
US-based OneGoal program (a university preparatory program for low-income high school students)
found that participants have an almost 50% higher chance of going to university than their peers and a
40% higher chance of graduating (Hallberg et al. 2022, p. 27). This program also demonstrates thebenefit of scaling such effects, having grown from a local pilot program to a national organisation serving
17 250 students by 2021 (OneGoal 2021, p. 5).
Building randomisation into programs can identify how they can best operate. For example, a retention
program at Charles Sturt University introduced a pre-census date assessment, with students failing tosubmit being contacted to be offered support if they wished to stay, or to be assisted to withdraw before
the census date if they did not. When the program was trialled, students were randomly allocated todifferent potential designs.
• Students not submitting the early assignment in one subject were either contacted by the subject
coordinator or an outreach team. Students were far more likely to modify their enrolment if contacted
by the outreach team, despite almost all of those who remained enrolled failing to submit any further
assessments. This suggests that specialised professional staff may sometimes be better placed tocontact disengaged students.
• Different methods of contacting students were tested. A phone call alone had a 20% success rate, but
the most effective method was a phone call, followed up by a text and an email if no contact was
made. This increased the call success rate to 55%, but discovering this required a willingness to trial
and evaluate different options.
This, and other well-designed program evaluations suggest the importance of personalised contact
through a combination of text messages and phone calls rather than emails alone, and the potential
benefits of using early assessment to identify disengaged students.
However, each university operates in a unique context, and findings from one setting will not always beuniversal. This underscores the importance of each institution testing different approaches to understandhow retention programs can best achieve their goals — and of having a mechanism to share lessons.
Source: Linden (2022).

A student dropping out does not necessarily imply that enrolling was the wrong decision, or that no benefit
was received. Most people who drop out of university report some benefit for their personal growth, skills or
career (Cunninghame and Pitman 2020; Norton and Cherastidtham 2018). However, a key question iswhether these benefits outweigh the costs (both to the student and the taxpayer), or whether an earlier exit
would have been better. Delayed exits mean that students are likely to forgo wages or can displace other123

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options in their lives, such as an alternative academic pathway. It can be difficult for potential students todetermine if a particular qualification is right for them without firsthand experience. Some may discover thatthey lack the requisite academic preparation or interest in the subject matter. Others may face personal or
financial issues that leave them unable to complete their course. Yet, many of these students stay enrolled incourses beyond the point at which it is apparent they will not succeed, incurring costs for themselves andgovernments. This is more pressing in the university context than the VET sector because university courses
are longer and loans are more prevalent (although expanding eligibility for income-contingent loans in VET
may change this (chapter 3)).
Given it is difficult to predict if a pathway is right for a student, the system needs to allow for experimentation,but encourage quick exits when necessary.

Nested qualifications lower the cost of an early exit
For some, a partial qualification may be a better outcome than completion. A student may gain enoughknowledge from their studies to secure their desired job and learn the rest on the job. In the VET sector inparticular, some individuals enrol in qualifications with the intention to take particular subjects and obtaintargeted skills, rather than a complete qualification (NCVER 2016).
However, it can be challenging to have this knowledge recognised. Without a formal qualification, students
may have difficulty demonstrating the skills they gained to employers. This is particularly problematic for
disadvantaged students who are more likely to face financial or health issues that make it more challenging
for them to complete their studies.
For VET students, the Productivity Commission’s NASWD review highlighted the need for better information
about credit pathways, and reducing barriers to credit pathways that would reduce the risks associated withpartial completion (PC 2020c, pp. 211, 430).
In higher education, the availability of nested qualifications (for example, awarding an associate degree to abachelor student who withdraws after two years) can help lessen the cost of experimenting with higher
education for those unsure if it would suit them (TEQSA 2019). These qualifications are uncommon at theundergraduate level.117
Student equity researchers and the Higher Education Standards Panel have recommended the expansion ofthese qualifications (Harvey and Szalkowicz 2016; HESP 2017; Nelson et al. 2017). This could assist
students who are only able to complete part of their studies by providing information to employers on theircapabilities and facilitating a potential return to study. The provision of such awards is beneficial so long as
they do not compromise the coherence and quality of course design.

117 Not all universities offer Diplomas or Associate Degrees as a form of ‘alternative exit’ from a bachelor’s degree.

However, a number of institutions do offer early exit degrees and awards, including but not limited to: Charles Darwin
University, Flinders University, James Cook University, University of the Sunshine Coast, and Deakin University.
124Boosting learning outcomes for tertiary students

Recommendation 8.13
Expand alternative exit opportunities through the provision of nested qualifications
The Australian Government should require that for any given undergraduate degree, Australian higher
education providers create at least one subset of courses that, if completed, lead to a lower level qualification
for students who decide to withdraw before completing the whole degree (‘a nested qualification’).
The Australian Government should leave the design, requirements, and timing of the nested qualification/s
to providers’ discretion, with the exception that any qualification would need to meet the relevant Tertiary
Education Quality and Standards Agency (TEQSA) standards and monitoring requirements.

A different approach to census dates could improve enrolment decisions
Many students are still enrolled in units of study they do not wish to take at the date at which students incur
fees for their course (the census date). Indeed, at one university a mark of zero was recorded for nearly 4%of units of study — consistent with little or no engagement by the relevant students. About one in tencommencing students recorded a mark of zero in at least one subject (Stephenson, Cakitaki andLuckman 2021). Even students who go on to pass a subject they enrol in may have benefited more frompursuing an alternative, but were too late to change their enrolment.
Recent regulations that took effect in 2022 attempted to ensure only ‘genuine’ students received government
funding and to protect students from study for which they are not suited (DESE 2022c). Students who, after
undertaking eight units of study, have failed most of them will lose CSP eligibility for that course.118 However,this will not protect disengaged students from debt incurred in their second semester.
Current arrangements require students, including those disengaged from their studies, to understand acomplex system and make an active choice. Most students either do not know when the census date is or are
unaware that if they are enrolled at the census date, they accrue the debt for that semester. More than one inten students had missed the census date for a subject they wanted to drop (Norton and Cherastidtham 2018).
There is scope to reduce this complexity to give students greater clarity and prompt them to make thedecisions best suited to their educational needs. A number of levers are available to universities to improvestudents’ enrolment decisions. Text messages, rather than email reminders, could be used to informstudents of the upcoming census date, as text messages are more likely to reach disengaged students andprompt them to act. Courses could also ensure that students are engaged in their studies prior to theircensus date through a small assessment early in the course. Students who do not submit this assessment
would be contacted to ensure that they still wished to continue, and could be withdrawn following repeated
failure to respond (Norton and Cherastidtham 2018). A similar approach — although more focused onoffering support than allowing for a costless exit — is already taken by many universities and seems to beeffective (Linden 2022; Parks, King and King 2021). As with supports for retention, there would be benefit intrialling different options at an institutional level to see what works.
To highlight the importance of what otherwise seems like an obscure issue, students should be made awareof the harsh reality that a census date is a notice of a payment that, if not acted upon, will entail unnecessary

118 Students are still able to receive a CSP if they change course.

1255-year Productivity Inquiry: From learning to growth Inquiry reportand unproductive debt. Altering its name to ‘payment date’ to be more explicit may help students to withdraw
or nominate alternative subjects before incurring a liability.
The above options are likely to encourage a rapid and less costly exit for students who will not succeed intheir studies, and instead pursue more productive pathways. They are also unlikely to worsen completion
rates, primarily causing students who would not have completed their studies to exit sooner, rather than raise
longer-run exits. Additionally, this may free up places for students that are more likely to complete theirstudies. When combined with grants to improve student retention measures, these strategies will ensure thatstudents are better supported to make decisions that benefit their labour market choices in the long run.

Recommendation 8.14
Give students support to complete and clarity to exit
The Australian Government should amend the Higher Education Support Act 2003 (Cth) (HESA) tosupport completion where desirable and facilitate early exits where necessary.
It should do this by:• providing grants to encourage higher education providers to experiment with and share new strategies
for student retention• assessing any individual grant for its effectiveness and lessons in post implementation reviews andevaluating the higher education grant program as a whole after six years to determine whether rounds offunding under the grant have contributed to a demonstrable improvement in student completion rates• amending the ‘census date’ in the HESA to the ‘payment date’ and requiring that universities effectively
communicate to students that the payment date is the time when they can exit without having to pay
fees for any initially commenced course.

4.5

Teaching for adaptive skill needs in VET

Notwithstanding the strong growth of the higher education system, VET remains a key system for acquiringformal post-school training with about 4 million students in 2021 compared with about 1.5 million for higher
education (NCVER 2022b).119 Given its scale, the central role it plays in lifelong learning, and the changing
nature of the vocational skills required in an increasingly digital and service-based economy, overcoming
systemic flaws in its design has become a major policy preoccupation.
Several recent reviews, including the Joyce review and the Productivity Commission’s NASWD review, haveaimed to improve and update the VET sector. While JCSF Consulting’s (sub. 97, p. 2) observation that thereis ‘no shortage in the stock of ideas for betterment of Australia’s tertiary education system’ rings true, reform
implementation in the VET sector over the past five years has been slow, partly due to COVID-19.
In this environment, employers’ satisfaction with VET has continued to trend down, with satisfaction for
nationally-recognised training consistently lower than unaccredited training (figure 4.5). In 2021, the overall
gap in satisfaction was just under 5 percentage points. The difference is more stark for certain industries,
with the largest gaps for ‘information media and telecommunications’ (25 percentage points) and

119 When adjusted for full-time student loadings, the systems are closer in relative size, reflecting that VET covers amuch greater diversity of courses, including short vocational courses to meet specific knowledge gaps.
126

Boosting learning outcomes for tertiary students‘administrative and support services’ (18 percentage points) (NCVER 2021a). As noted in this inquiry’scompanion volume ‘Australia’s data and digital dividend’, for digital skills acquisition, many employers preferindustry-provided short courses compared with formal learning options offered in VET and other sectors.
Among those employers dissatisfied with nationally-recognised training, the most common concerns were that it
did not teach relevant skills (37%) or was of poor quality (36%), with some also reporting the content was
outdated (14%). Further, the most common reason employers cited for favouring unaccredited training was that it
was tailored to their needs (38%), with the share giving this reason almost doubling from 2015 (NCVER 2021a).
Figure 4.5 – Employer satisfaction is consistently higher for unaccredited training
Percentage satisfied among employers using VET
100
Employers using
unaccredited training% satisfied

90

Employers using
nationally recognised training

80

70

60
2005

2007

2009

2011

2013

2015

2017

2019

2021

Source: NCVER (2021a).

Skills Reform has the potential to drive much needed change
Over the past year, there has been greater action in implementing VET reform recommendations(DEWR 2022d). The recent Skills Reform measures are welcome and necessary steps in transforming the
VET sector so that it is better able to teach, recognise and develop adaptive skills. These reform measures
are wide ranging, and if successfully implemented, have the potential to fundamentally re-shape the VET
sector. The measures include changing the existing qualification framework and updating training package
content and development, including an overhaul of competency-based assessment.

Training package development and content will be more responsive
Training packages and competency-based training (CBT) and assessment have been the cornerstone of theformal VET system since the early 1990s. In this inquiry, the Productivity Commission found there is stillbroad-based support of CBT, which has several important and well-established benefits.
••

By focusing on the outcome of training (what the student can do), rather than the inputs (such as timespent training or who delivers it) it supports a model of contestable and open training markets.
It means qualifications are nationally portable and have currency with industry regardless of where
they were issued; as well as facilitating credit transfer for students.

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5-year Productivity Inquiry: From learning to growth Inquiry report••

It allows for an industry-led (rather than provider-led) training system, with industry representatives
involved in defining and updating competencies being taught.
The process of assessing students’ competency, by observing the performance of tasks and awarding
qualifications, also provides an important form of quality assurance for training outcomes.

Training packages allow industry representatives to agree on and define units of competency that arenecessary for an occupation.120 RTOs then develop course material to meet the competencies embedded intraining packages.
However, submissions noted the overly prescriptive nature of CBT (Ronald Jackson, sub. 171, p. 12) and the
difficulties in developing timely and relevant training package content (NECA, sub. 108, p. 2). These
concerns were also raised as part of the Joyce Review (2019a, p. 58) and the Productivity Commission’s
NASWD review (2020c, p. 238).
Despite its strengths, CBT is backwards-looking by nature. It is prescriptive and limited to actions that can beapplied and observed in an existing workplace setting. This can be highly effective for certain forms of
training, such as regulated trades where job requirements are relatively stable and competency can beclearly observed and mapped to workplace actions. But it can limit acquisition of broader knowledge that canbe adapted and applied in multiple and fluid settings. Training packages can quickly become outdated,particularly for digital skills for which regular and quick updates are necessary for continued relevance(Wibrow, Circelli and Korbel 2020).
However, major reform in this area is now underway.
As part of the Skills Reform initiative, newly-formed Jobs and Skills Councils (JSC) will have responsibility fortraining package development, taking over from Industry Reference Committees and Skills Service Organisations(DEWR 2022a).121 Under the previous system, it would take a year to develop a training package andendorsement could take years more (Joyce 2019b). JSCs will have greater industry representation and areintended to make training package development less time-consuming and more responsive.
Changes are also underway for CBT. One of the key Skills Reform projects is the VET Qualifications Reform
program that proposes to replace units of competency with ‘Skills Standards’.122 The purpose of Skills
Standards is to reflect broader attributes and functions required by an occupation, as opposed to specific job
tasks that were more easily distilled into units of competency. They are intended to be predominantly‘industry-sector neutral’, and can be either ‘cross sectoral’ which are relevant to multiple industries,‘specialised’ which are more industry-specific ‘or ‘foundational’ which can be applied across all industries forstandards relating to reading, writing and numeracy (DEWR 2022b). Using an example of how the proposedmodel would work when applied to the Certificate III in Floristry, the qualification’s 16 core units that sit within
40 overall units of competency would be replaced by six broad skills standards (Ai Group 2022, p. 6).
This allows for formal recognition of a more applicable and portable set of skills for a person who may have aseries of jobs either within a sector (for example, services or hospitality) or across several sectors over their
120 Nationally-recognised qualifications comprise ‘units of competency’ (individual subjects such as ‘responsible serviceof alcohol’) which may be grouped into ‘skillsets’ (such as ‘work zone traffic control’ or ‘food safety supervision’, both ofwhich are included in ‘training packages’ (such as a Certificate or Diploma).
121 The ten industry groupings for the new JSCs are: Agribusiness; Arts, Personal Services, Retail, Tourism and
Hospitality; Energy, Gas and Renewables; Finance, Technology and Business; Manufacturing; Mining and Automotive;
Transport and Logistics; Public Safety and Government; Early Educators, Health and Human Services; and Building
Construction and Property.
122 Consultation on this model is currently underway with a stakeholder survey and information sessions conducted by
the Department taking place over the first half of 2023 (DEWR 2022b).
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Boosting learning outcomes for tertiary students

working life. It also allows for the assessment of generic, non-technical skill sets that apply acrossoccupational groupings that are of growing importance to Australia’s economy (chapter 1).
Skills Standards will also be independently assessed, in line with the Productivity Commission’s
recommendation in the NASWD review, to help allay concerns about uneven quality standards among VET
graduates and provide employers with greater confidence (PC 2020c, p. 249). There has also been somemovement toward incorporating proficiency-based assessment, as previously recommended by the
Productivity Commission (2017a, p. 96). The Digital Skills Organisation123 Digital Pathways Project
incorporates levels of proficiency across three groups in their occupational standards assessment system tobetter reflect the broad range of digital skill sets needed across most present day occupations(Schueler 2021, p. 25).
The framework and existing implementation plans for these changes are sound. The test will be whether
they are delivered promptly and well. Ten JSCs are expected to become fully operational over 2023
(DEWR 2022a). When assessing the efficacy of training package development in 2019, the Joyce Review
found that an over-bureaucratised process and a lack of industry engagement led to training packages
becoming ‘very cumbersome and complex and too hard to change’ (2019a, p. 53). There is a need tooversee the new VET system ‘architecture’ to ensure that training product development avoids the time
consuming and bureaucratic processes of the system it is replacing.
The Independent Training Package Assurance (ITPA) function in the Department of Employment andWorkplace Relations (DEWR) should extend its existing role to monitoring the output of the JSCs to ensure thatthe time taken to develop training packages is shorter, while remaining responsive to industry and workplacerequirements. Examples of innovative training package design should be identified by the ITPA function anddisseminated across the wider network of JSCs to establish models of best practice. DEWR should also guideand assist the JSCs in developing cross-sectoral skills standards as a priority over the next year. This will also
reduce duplication for the JSCs as they commence their training package development work.

Recommendation 8.15
Support a responsive VET sector
The Australian Government, in consultation with State and Territory governments, should continue reforms thatenable the VET sector to support an adaptive workforce and keep pace with industry needs, by:• monitoring the development of training packages under the newly formed Jobs and Skills Councils(JSCs) to:– ensure their development takes place within acceptable timeframes– identify and disseminate best practice and innovative training package design models• prioritising the development of cross sectoral skills standards that are applicable across industries over the
next year to both reduce duplication in training package development for the JSCs and allow individuals
enrolled in the VET system to be assessed against these new standards as soon as possible.

123 This is one of three recently completed Skills Organisation Pilots trialling new approaches recommended by the Joyce

Review. The other pilot programs covered the mining and health industries.
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The VET workforce will also need to be supported
The greater ambitions and sophistication of the new VET system will require further investment in VET
workforce capability across a wide range of delivery modes — VET in schools, Adult and Community
Education providers, private RTOs and TAFEs.
A prominent but contested concern is whether VET teachers have sufficient skills. Some argue that VET
teachers have become deskilled due to a twenty-year reliance on CBT and declining levels of pedagogical(VET teaching) qualifications since 2000 (ACDEVEG, sub. 116, p. 1).
Changes to address such perceived gaps in capabilities involve trade-offs.
On the one hand, demanding higher levels of training than the existing Certificate IV for trainers may limit
supply, especially given that a significant source of teachers are people who have worked formerly inindustry and have commenced a teaching role later in life, and often only on a part-time basis. Indeed,trainers and assessors do not even need to complete the Certificate IV in Training and Assessment (theminimum qualification requirement) before working in the sector, just to be enrolled in the course as soon aspracticable. This reflects the need to access trainers with relevant and up to date industry experience.
On the other hand, even if VET teachers have strong practical knowledge, transmitting that effectively
requires pedagogical skills, an issue that has confronted governments for some time.
There has been some recent action to improve the quality of teaching in the VET sector, including an
updated Training and Education Training Package with an improved version of the Certificate IV qualificationthat has greater pedagogical depth and rigor (Smith 2022, p. 9). Nonetheless, there is a concern that moves
to incorporate proficiency or some other form of graded assessment will require an added level of
independent judgement on the part of VET teachers and trainers that has to be justified or defended against
some form of external review, and that these are ‘skills that go way beyond what is in the Cert IV Training
and Assessment’ (Misko and Circelli 2022, p. 23). As the VET assessment system evolves beyond CBT toincorporate independent and proficiency-based assessment, the VET workforce will need to accessappropriately designed and funded professional development opportunities to implement these newassessment methods successfully. In light of this, the Australian Government should fund extra training anddevelopment programs for VET trainers and assessors so they can adequately perform independent andproficiency-based assessment.
An associated challenge is that even under the current system, there are major obstacles to an adequate
VET teaching workforce, with difficulties in retaining adequately trained staff in the current tight labour market
and, over the longer term, the implications of an ageing workforce.
Strategies for addressing attraction, retention, career development and succession planning are being
developed as part of the upcoming Blueprint for the VET Workforce. The VET workforce strategy should beunderpinned by evidence, including a VET workforce census, undertaken by the National Centre for
Vocational Education Research that would focus on teachers’ industry experience, pedagogical andprofessional characteristics (PC 2020c, pp. 243–244).

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Boosting learning outcomes for tertiary students

More flexibility and experimentation in provider models will also support thecontinued relevance of VET
A more flexible approach across Australia’s tertiary sector will require greater autonomy for VET providers.
For example, in Singapore, quasi-Government VET institutions have greater autonomy to develop andassess courses (Varaprasad 2021), which has contributed to a higher status for VET:In Singapore, the formerly dilapidated Institutes of Technical Education have been entirely overhauled,materially and in spirit. Now, they emphasise future skills training, with a technology edge … This, inturn, has amped up the prestige of the sector, drawing in students who would have previously only
considered a university education. (Peter Noonan cited in Siekmann and Fowler 2017, p. 33)
The establishment of two Institutes of Applied Technology (IAT) in New South Wales, slated to open in 2023
emulates the Singaporean model. The NSW Government explained that:… [the] IAT will not be a ‘Super TAFE’. Nor will it be a ‘dual sector’ institution, offering vocationaland higher education in separate streams. It will not take the place of university-based programs
that already deliver foundation or bridging courses to higher education students. Rather, the IAT
will be a ‘single sector’ tertiary institution. Through a number of colleges each focused on aparticular industry, the IAT will embed and integrate practical and theoretical components oftertiary education throughout its curriculums. (Gonski and Shergold 2021, p. 11)
The new IAT-Digital will deliver a curriculum that incorporates big data, cyber security, artificial intelligenceand cloud computing, while the IAT-Construction will focus on high-level skills aimed at professional workers
in the construction industry, such as project management and leadership. Qualifications will be delivered atboth IATs in partnership with universities and industry (NSW Department of Education nd). This educationand training model demonstrates greater connection between the higher education and VET sectors andindustry, as well as the recognition and incorporation of microcredentials into the formal qualification system.
Development of IATs will offer greater choice to students beyond the traditional, binary system of either VET
or higher education (chapter 3). Drawing on the lessons from the NSW initiatives, other jurisdictions should
begin to examine how they can develop tertiary institutes that combine VET and higher education content
and industry expertise, subject to their own legislative and institutional frameworks.
The further growth of new institutional arrangements such as IATs will reveal whether the recently instituted
reforms across the VET sector are shifting the sector from its narrow focus on defined skill sets to a model
that, while still vocational in orientation, can accommodate more innovative models for delivery of lessprescriptively-defined and more adaptable skills.

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Recommendation 8.16
Improve VET teaching, pathways and partnerships
To ensure the successful implementation of Skills Reform, the Australian Government should:• fund extra training and development programs for VET trainers and assessors so they can adequately
perform independent and proficiency based assessment• task the National Centre for Vocational Education Research to conduct a census of the VET workforce,
focusing broadly on the characteristics of teachers at the provider level, including their pedagogical andoccupational qualifications, as well as industry experience.
The Australian Government, together with State and Territory governments, should also continue toimprove pathways between VET, higher education and industry.
• Other State and Territory governments should monitor and follow the example set by the New South
Wales Government’s Institutes of Applied Technology, and support local models of vocationally oriented
tertiary education that deliver qualifications combining VET and higher education content together withindustry expertise.

132

Appendices

Appendices133

A mixed story – performance of higher education

A. A mixed story — performance of
higher education

As noted in chapter 4, there are no simple indicators of the outcomes from teaching in universities.
Aggregate outcomes, students’ assessments of teaching quality, and the incentives for universities to teachto a high standard form a trio of incomplete indicators for the degree to which universities are likely to fulfill
their teaching function. This appendix relates to the first two quantitatively-based indicators. While thesehave some nuanced elements, it is more straightforward to investigate them. In contrast, the conflicting
incentives universities face are multitiered and complex and their resolution is a key instrument for achieving
better outcomes, which is why they are addressed in the chapter.

A.1

The quality of outcomes from university training are
generally high

University graduates achieve higher rates of employment, experience lower unemployment rates and havehigher labour force participation rates than those who acquire skills via VET or school alone (figure A.1).
They are much more likely to earn more than $1500 a week than non-university graduates (figure A.2). They
are also more likely to work in the highest skill occupations that increasingly underpin productivity andeconomic growth. Students apply the skills they have acquired at university to their jobs, even if theiroccupations are in fields outside those studied — suggesting that university students acquire portable skills.
Employer satisfaction rates with university graduates are also high (chapter 1).
However, not all of these correlations reflect what universities do. Variance in outcomes by educational
attainment partly reflects that entry to university depends on academic and cognitive ability, which
independently affects labour market outcomes. So too is the commitment by students to put aside three ormore years to learning, much of it driven by their own motivation and passion, rather than the direct efforts of
the institution they have enrolled in. The accreditation role of universities remains important, but that isdifferent from the actions universities take to promote learning. These factors exaggerate the causal impact
of providers on labour market outcomes.
Nonetheless, even after controlling for inherent ability and other confounders, university education — if
completed — has large positive impacts on labour market outcomes of Australians compared with otherforms of education (Marks 2018). While university has differential impacts on students with prior lower
academic results and from ‘equity’ groups (such as students from lower socio-economic backgrounds), formany such groups, the value-added from university in Australia still compares favourably to alternative
training (PC 2019; Zając et al. 2021). Indeed, the favourable effects of higher education on labour outcomesis supported by a broader international literature (chapter 1). Against that background, Australian universities— as a whole — appear to be successful in raising average skill levels.

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Figure A.1 – Key labour force outcomes are good for university graduatesa
People aged 25 34 years, not in education, 2021

Lower
education

Unemployment rate

Participation rate

Full-time employment rate

73.9

61.8

8.1

Certificate III
or IV

68.8

88.9

3.7

Diploma

60.9

87.3

3.8

Bachelor
Degree71.5

93.0

Graduate
Diploma

66.9

94.2

1.7

Postgraduate

72.8

93.3

3.6

0

0

50
%

2.6

0

50
%

5

%

a. The 25-34 year age range was selected because it will reflect job outcomes after some reasonable period after
completion of studies, but exclude people whose training occurred in education systems that were different from those inrecent times. The results only relate to people who are not currently attending an educational institution. Shares exclude
people who did not indicate their labour market outcomes or educational attainment.
Source: ABS (Census of Population and Housing: 2021).

Figure A.2 – University graduates are faring well in labour marketsa

Qualification

Weekly income and occupational skill levels of 25-34-year-old workers
Lower education

11.5

Lower education

Certificate III or IV

9.0

Certificate III or IV

Diploma

20.2
32.5

Diploma

24.4

Bachelor Degree

62.7

25.9

Bachelor Degree

47.1

Graduate Diploma/Cert.

75.2

Graduate Diploma/Cert.

54.0

Popstgraduate

67.4

Postgraduate

45.8

0

20

40

60

80

Share in most skilled occupation (%)

0

20

40

Share earning $1500+ a week (%)

a. See note for figure above.
Source: ABS (Census of Population and Housing 2021).

Trends in outcomes for university graduates tell a more nuanced story (Aungles, Hodgson andParbery 2021). On the one hand, there are some indications that outcomes have worsened over time. For

136

A mixed story – performance of higher education

instance, the full-time employment rate of undergraduates four months after graduation fell from above 80%
in 1982 to just below 70% in 2020, and while unemployment rates for those with a bachelor or higher
qualification have been typically below 4% from 1979 to 2020, the unemployment gap between VET andother qualifications have narrowed over time, and there has been a slight diminution in the median wage
premium for bachelor degree over Certificate III/IV holders between 2004 and 2020.
On the other hand, full-time employment for undergraduates three years after completion of their degree fell
only slightly over the ten years to 2020 and has even increased from 2015. And notwithstanding theshort-term damaging effect of the Global Financial Crisis (GFC) on graduate outcomes, the longer-run
growth in median incomes of the cohorts of graduates completing their studies since the GFC was
surprisingly more rapid than the graduates completing their studies in the year before the GFC struck(Aungles, Hodgson and Parbery 2021, pp. 38–40).
The generally modest reduction in some labour market outcomes over time is unlikely to be evidence of adiminishing quality of university teaching, but due to a change in the mix of students. Over time, the share ofyoung people entering university has greatly expanded, so the additional entrants have worse school results.
Similarly, labour market conditions also vary over time, and are beyond the control of universities.
Similar issues confront assessing the value added by individual universities. At any given time, thedifferences in outcomes will only partly reflect the efforts of universities to impart skills to their students. The
labour market outcomes of any given university depend on the prior academic ability of the students they
attract, the vocational orientation of the institution and, crucially, the length of time considered. For example,
the 2007 cohort of bachelor graduates of the University of Sydney earned substantially less in 2009 than the
more vocationally-oriented graduates from the University of Technology Sydney and the University of Notre
Dame but had significantly higher earnings by 2018. This partly reflects that bachelor’s graduates in lessvocationally-oriented universities are more likely to engage in further study, which limits their short-term
incomes. Their earnings may also be more responsive to experience. Overall, the empirical evidence
suggests that the university of origin explains only about 2% of the variation in long-run median university
graduate incomes (Aungles, Hodgson and Parbery 2021, pp. 41–54).124
Once many student outcomes depend on luck in labour markets, preferences for certain types of jobs andunobserved aspects of students that also affect salaries such as their motivation levels, the more difficult it is
to causally ascribe outcomes to the teaching efforts of universities. As discussed further in chapter 4, this is
the key challenge facing the implementation a workable performance-based funding model.

A.2

The quality of the university experience

Prima facie, improvements in the quality of university education, and particularly teaching quality, could be
expected to increase:• students’ skills, which raises their future employment, productivity and wages• the quality of the university experience, which has separate value, including in attracting people toundertake tertiary education in the first place• student completion rates, by raising competency and confidence in students who are struggling, whichenables some students to obtain a qualification they would otherwise have forgone.

124 Even after controlling for the study area, full-time or part-time study and student traits (such as gender, age group, ATAR,

and location) and the study area, more than 85% of the variation in long-run graduate incomes remains unexplained.
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5-year Productivity Inquiry: From learning to growth Inquiry report

There are few attempts at objectively assessing teacher quality. Observational studies using proveninstruments for assessing quality are rare and costly. Therefore, evaluating the size of the effects must relyon student perceptions of their experiences at university.
The subjective evidence of students’ perceptions points to reasonably good performance. About 80% of
domestic university undergraduates rated teaching quality, skills development and learning resources
positively. However, student support (about 70%) and learner engagement (less than 50%) were less wellrated (figure A.3).125 In general, domestic students rate the performance of universities higher thaninternational students, but not by much.
The particularly poor outcomes for learner engagement reflects the effects of COVID-19. By forcing students into
online learning, the pandemic had adverse impacts student interaction outside study and opportunities to interact
with local students, which are key elements of learner engagement. (The rating fell by more than 15 percentage
points between 2019 and 2020). The challenge of online learning is discussed further in chapter 4.
Figure A.3 – Undergraduate perception of the key domains of university performance, 2021
90

Share who are positive (%)

80

80

76

80

79

75

70

81

79
72

69

81
75

72

74

73
66

60
48

50

45

48

40
30
20
10
0

Skillsdevelopment

Learnerengagement

Teaching quality Student support

Domestic student

International student

Learning
resources

Quality of entire
educational
experience

Total

Source: SRC (2022c).

Surprisingly, there was no significant reduction in perceived teaching quality or skills development
associated with the pandemic — the domains likely to be most strongly related to the capacity of universities
to produce good outcomes (figure A.4). Moreover, the mediocre rating of the overall university experience in2020 and 2021 is likely to be a temporary effect of the pandemic, and already shows improvement as
on-campus classes rise.
It is also notable that very few students gave poor ratings for the key items. For instance, among universities,
less than 4% of undergraduate students rated the overall quality of teaching as poor in 2021 (covering both
domestic and international students) and just over 5% rated their overall experience at university as poor.126

125 Depending on the domain, a positive response is where students nominate Quite a bit/Very much on a 5-point Likert

scale of Not at all/Very little/Some/Quite a bit/Very much, or Good/Excellent on a scale from Poor/Fair/Good/Excellent.
126 Based on unpublished QILT data analysed by the Commission.
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A mixed story – performance of higher education

Nevertheless, to the extent that students’ perceptions are accurate, these estimates still point toconsiderable wasted resources and opportunities.
An encouraging facet of university performance across the key broad categories of a quality education is thatthe variation in average outcomes for undergraduates from different demographic groups is very low with the
exception of learner engagement (SRC 2022b, pp. 8–10).127 This suggests that universities are achieving
reasonably consistent outcomes for a wider range of student types, which is important as diversity in thestudent body increases.
Figure A.4 – Undergraduates’ perceptions of qualitya
Universities and non-university higher education institutions, 2021
85

Share who are positive (%)

8075
Skills development
Teaching quality
Quality of entire educational experience

70

65
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

a. Non-universities were included from 2015, but given score similarities in overlapping years, is unlikely to invalidate thelonger trend analysis. Results include international students.
Source: SRC (2022b).

Granular results point to some mediocrity
At the more granular level, university undergraduates’ perceptions of the effectiveness of universities’
capabilities to develop skills and teach were more mediocre than their overall higher impressions (tables A.1
and A.2). For instance, feedback is an essential element of effective teaching and the efficient acquisition ofskills, but nearly half of students rated this as only happening sometimes, or not much or not at all.

127 Among other student traits, this includes gender, first in family status, age, ethnicity, international student status andsocio-economic status. For four of the five categories of quality, there is only a one or two percentage point variation inpositive ratings across different student groups. The greater variation in learner engagement is solely due to the much
lower positive ratings for students who are solely studying remotely from the university.
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5-year Productivity Inquiry: From learning to growth Inquiry report

Table A.1 – Undergraduate perceptions of the effectiveness of skill developmenta
Universities, 2021
Skill type

Positive rate (%)

Change from 2020

Developed critical and analytical thinking

70up

Developed ability to solve complex problems

61

same

Developed ability to work effectively with others

59

up

Developed confidence to learn independently

72

same

Developed written communication skills

64

up

Developed spoken communication skills

52

up

Developed knowledge of field studying

76

same

Developed work-related knowledge and skills

62

up

a. A positive response is where students nominate Quite a bit/Very much on a 5-point Likert scale of Not at all/Verymuch/Some/Quite a bit/Very much. The results relate to domestic and international students.
Source: SRC (2022c).

Table A.2 – Undergraduate perceptions of teaching qualitya
Universities, 2021
Aspect of performance

Positive rate (%)

Change from 2020

Study well-structured and focused

65

upStudy relevant to education as a whole

73

up

Teachers engaged you actively in learning

63

up

Teachers demonstrated concern for student learning

59

down

Teachers provided clear explanations on coursework and assessment

67

up

Teachers stimulated you intellectually67

up

Teachers commented on your work in ways that help you learn

54

up

Teachers seemed helpful and approachable

70

same

Teachers set assessment tasks that challenge you to learn

77

same

Overall quality of teaching77

up

Quality of entire educational experience73

up

a. A positive response for the first nine aspects is where students nominate Quite a bit/Very much on a 5-item Likert
scale of Not at all/Very much/Some/Quite a bit/Very much. For the quality items (10 and 11), a positive response iswhere the student nominates the aspect as Good/Excellent from a 4-item Likert scale of Poor/Fair/Good/Excellent. The
results relate to both domestic and international students. The overall assessment score for teaching and the entire
student experience is not an average of individual assessments, but a holistic assessment by students.
Source: SRC (2022c).

There are sizeable variations in performance between universities
There is considerable variation in the performance across universities on key domains of their educational
functions (figure 4.2 in chapter 4). Deeper analysis shows that the differences in the overall quality ofteaching between universities is the most influential determinant of the variations between them in students’
perceptions of the overall quality of the entire educational experience, although student support and140

A mixed story – performance of higher education

resources play a residual role.128 Perceptions of skills development do not have any independent effect on
differences in overall perceived educational quality and are largely determined by perceived teaching quality.
The variations between universities mainly appear to reflect the extent to which they are mediocre rather thanpoor in undertaking their key functions as the degree of variance in poor ratings is relatively low (figure A.5).
Figure A.5 – Distribution of poor ratings of education quality across universities, 2021a50

Frequency

4030Overall experience

Teaching quality

20

10

0

0

1

2

3

4
5
Poor outcomes (%)

6

7

8

9

a. Densities estimates are based on a Gaussian kernel.
Source: Unpublished QILT data from the Social Research Centre.

Perceptions and outcomes are only partly related
While students’ perceptions of skill acquisition are linked to perceived overall teaching quality, the evidence
suggests that subjective assessments of teaching quality have weaker links to actual labour market
outcomes. For instance, while figure 4.2 in chapter 4 shows considerable variation between universities in allof the various domains of educational quality, graduate outcomes data show far smaller differences inmedium-term full- and part-time employment outcomes (SRC 2022d).
Across universities, a 10% increase in average perceived teaching quality is associated with about a 1%
increase in full-time graduate employment three years later, but with a level of imprecision that would noteven rule out a negative impact.129 The relationship is negative for graduate salaries — a clearly spurious

128 These results are based on analysis of student ratings across universities, and so seeks to explain the variations in

the overall ratings at the university level. This analysis is relevant to any model of performance-based funding. Further
analysis — not undertaken — could use student level data. This could inform the determinants of student ratings of theiroverall university experiences for each university and whether these were uniform across universities (which, given thenature of their student intakes and varying vocational orientation, is unlikely). This is a fruitful area for future analysis.
129 Alternatively, a one standard deviation increase in teaching quality increased the full-time employment rate by about
0.3 percentage points, although this estimate has a wide confidence interval. These results are based on Commission141

5-year Productivity Inquiry: From learning to growth Inquiry reportresult. This replicates the results of global research, which typically find immaterial and sometimes negative
links between subjective student satisfaction ratings and labour market outcomes (Falch et al. 2022). Thissuggests risks in using subjective measures of satisfaction in performance-funding or in informing newstudents about the relative career outcomes they might expect from the tertiary pathway they might choose.
However, this does not mean that teaching quality is unimportant. It may just mean that the subjective measuresof quality are too simplistic to capture all of the facets of teachers that influence outcomes. Even on face validity
grounds alone, it seems very unlikely that an excellent university teacher would raise skills by the same amountas a poor teacher. If the outcome of effective teaching is to raise post-graduation incomes per student by even asmall amount (say just 1%) for a given university then across all the students enrolled, the economy-wide benefit
is many hundreds of millions of dollars per year.130 This large effect may be hard to detect when looking at the
average outcome per student given all of the other determinants of labour market outcomes.
Furthermore, in school settings, there is compelling evidence that higher levels of teacher competence leadto significantly higher levels of student achievement (Hanushek 2011). Indicative estimates suggest that ateacher who is one standard deviation above the average teacher (in terms of their ability to increase student
achievement), instructing a classroom of 15 students, could increase the average lifetime earnings of theclassroom by about $530 000 in a given year; or about $35 000 per student (PC 2023, pp. 333–334). It
would be remarkable that an effect that was clear in one learning environment had entirely vanished several
years later in another learning environment.
In addition, students’ subjective assessments are still likely to affect the quality of their university experience andthe likelihood that they will continue their studies. Nearly one fifth of students who considered early departure citedquality concerns as the reason for doing so, and about one quarter claimed that their expectations were not met(SRC 2022b, p. 29). So, while these are subjective assessments, they matter for behaviour.
Finally, the quality of a person’s education may have longer-run non-economic effects on students — suchas how they relate to people, their personal interests, and networks.

analysis of QILT student ratings across universities in 2018 and graduate outcomes for the same cohort three years
later. The result is only indicative because it does not control for any aspects of universities (such as their location, themix of courses, and the nature of the student intake).
130 Based on some indicative calculations by the Commission, drawing on shifts in the Mercer equation for lifetime earnings.
142

Stylised simulations of economy-wide effects

B. Stylised simulations of
economy-wide effects

The Productivity Commission used a whole-of-economy model to illustrate the potential effects of some of
the recommendations in this report in a stylised way. This model is static, in that it does not capture dynamic
effects over time. Rather, the results are interpreted as if the effects of a shock to the economy could happen
overnight. While the simulations are stylised and there is a high level of uncertainty in the impacts of the
proposed recommendations and other model assumptions, the simulations provide insight on how potential
productivity improvements could flow through the economy’s structure and the differential impacts acrossindustries and household types. Further details of the model, simulations and effects of sensitivity testing arecontained in this inquiry’s companion volume ‘Whole-of-economy modelling’.

Improving school education quality131
The model was used to run three simulations to illustrate the potential effects of improving the quality ofschool education — one simulation to illustrate the ‘short run’ effects, and subsequent simulations for ‘long
run’ and ‘very long run’ effects.132• The short run impact was an immediate improvement in the labour productivity of workers in the ‘school
education’ industry, modelled in this simulation as a 3% productivity increase as a result of better use of
curriculum resources to save teachers’ time and improve practices, as well as better integration oftechnology within classrooms.
• The long run illustrates the economic impacts once school quality improvements have resulted in moreproductive workers in the first group of school leavers that will initially benefit from better school quality,
via a 2% increase in the labour productivity of 15-24 year old workers. This effect occurred on top of theshort run impact.
• In the very long run, all workers that have completed school will have done so in the improved system, so
it is assumed that the 2% labour productivity improvement applies to all labour types. This effect occurred
on top of the short run impact.
For all these simulations, labour use (as measured by hours worked) in the ‘school education’ industry was
assumed to be fixed. It was assumed that reforms to improve school education quality would not change the131 Referred to as simulation 5 in this inquiry’s companion volume ‘Whole-of-economy modelling’.
132 It has been assumed in all three scenarios that the time horizons were sufficient to allow the capital stock to grow and tomove flexibly between industries, despite the assumption of a fixed capital stock being common in short run simulations.
143

5-year Productivity Inquiry: From learning to growth Inquiry report

hours worked by teachers and other workers in the ‘school education’ industry, but that those hours would be
more productive.133

Short run
Simulating increased labour productivity in ‘school education’ led to an estimated reduction in the relative price of‘school education’, as the relative cost of producing a unit of ‘school education’ was reduced.134 In most industries,
such a change would lead to an increase in production and output. However, schooling is a special case whereby
the amount of schooling delivered in the economy meets population demands (the model does not incorporate
any population changes, which means there is no source for changing demand). The resulting change cantherefore be interpreted as improvements to the quality of education delivered, at a relatively lower cost. In orderto produce the increased quality, there is also a corresponding increase in capital in the model.
In this simulation, wage rates and capital rental prices both increased relative to the economy-wide CPI, so
household incomes increased as a result of increased labour and capital income.
The effects on the quantity of output produced by other industries varied depending on relative changes in
consumption by different users. Domestically, household consumption of commodities other than ‘school
education’ increased. While these other commodities experienced relative price increases due to increased
input costs, which induced lower demand, this effect was more than offset by the increased demand arisingfrom higher household incomes. But internationally, for more export-intensive industries such as ‘agriculture,
forestry and fishing’, ‘mining’, ‘advanced manufacturing’ and ‘other manufacturing’, the increased input costs
made these commodities less competitive in the foreign market, which led to an overall decrease in theseindustries’ real output and reduced labour in these industries.
Real GDP and real gross national income (GNI) increased by 0.08%. Sensitivity testing found that the real
GDP increase ranged from 0.05% to 0.11% under different assumptions about the size of the labour
productivity shock for the ‘school education’ industry (chapter 4 of this inquiry’s companion volume‘Whole-of-economy modelling’).
Household wellbeing increased, reflecting increased consumption and leisure, as labour use across the
economy fell slightly. The value of this increase was estimated to be $1.4 billion in aggregate in 2018-19
dollars (that is, if this amount was given as extra income instead of the productivity shock, households would
be as well off as they were estimated to be after the productivity shock). University-educated workers had
slightly higher increases in real wages rates (that is, wages relative to the CPI) (figure B.1, panel a). These
relative wage effects were observed because the ‘school education’ industry largely employed
university-educated labour, and the assumption that labour in that industry is fixed (rather than being able tobe redeployed to other industries) led to greater upward pressure on their wages.

Separate simulations that were run without fixing labour in the ‘school education’ industry resulted in labour being
reallocated to other industries. This occurred because the model was built on relationships in the market sector where
productivity improvements typically result in a reallocation of resources toward their most efficient use. ‘School
education’, however, is a non-market service, and productivity improvements are unlikely to lead to workforce reductions,but rather would improve the quantity or quality of outputs while retaining the workforce.
134 ‘School education’ is a non-market service in which prices generally do not significantly affect the amounts produced
or consumed. The price changes for ‘school education’ in this simulation merely represent the mechanics of the CGE
model (which was structured based on market sector relationships).
133

144

Stylised simulations of economy-wide effects

Figure B.1 – Estimated changes in real wage rates by select labour groups across shortrun, long run and very long simulations of improved school quality
a. Short run
by education level% change

0.12
0.10
0.08
0.06
0.04

0.02

1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

2.5

2.0

% change

0.14% changec. Very long run
by age groupb. Long run
by age group

1.5
1.0
0.5
0.0

0.00
School VET

Uni

Source: Productivity Commission estimates.

Long runIn addition to the short run impacts on the ‘school education’ industry discussed above, the long run
improvements to labour productivity for 15-24 year old workers saw producers substituting toward theselabour types due to their higher productivity. This led to an overall increase in hours worked by 15-24 year
old groups, and a decrease for older age groups, particularly those aged 55 and over. Real wage rates
increased for all age groups relative to the economy-wide CPI, but real wage rates for 15-24 year old groups
increased the most (figure B.1, panel b).
Labour use decreased in the ‘retail’ and ‘hospitality’ industries as these industries most heavily utilised 15-24
year old labour. This decrease was because more output could be produced with the same amount of labour,which more than offset the additional labour required to meet the increase in demand for ‘retail’ and ‘hospitality’
goods and services (arising from higher household incomes and therefore consumption). Changes in labour
use in other industries was mixed, with the overall effect on hours worked in the economy largely unchanged.
Almost all industries increased their quantity of output produced, due to the benefits of improved labour
productivity. Investment and the capital stock also increased to meet requirements for capital for increased
production, and the relative price of capital rental increased.
Real GDP and real GNI increased by 0.2% (which includes the more immediate effects of improvements inlabour productivity in the ‘school education’ industry, discussed above), through increases to realconsumption, investment and government expenditure. Sensitivity testing found that the real GDP increase
ranged from 0.1% to 0.3% depending on assumed changes to the labour productivity shock simulated(chapter 4 of this inquiry’s companion volume ‘Whole-of-economy modelling’).
Household wellbeing increased due to increased consumption and increased leisure for older age groups,
and the estimated value of this wellbeing increase was about $2.8 billion in 2018-19 dollars in aggregate.
Consumption inequality decreased slightly as the 15-24 year old labour groups, who initially had lower
consumption, experienced relatively higher real wage rate increases and hence were able to increase theirconsumption by a greater extent.

Very long run
In the very long run, labour productivity improvements through improved schooling were assumed to flow
through to all age groups, in addition to the continued impact of improved labour productivity in the ‘school145

5-year Productivity Inquiry: From learning to growth Inquiry reporteducation’ industry from the short run changes. All industries increased their quantity of output produced asa result of the productivity improvements. Total hours worked was largely unchanged, and the capital stockincreased to support growth in production.
Hours worked increased slightly across most age groups, but decreased for retirement aged workers, whose
choice of labour supply was calibrated in the model to be more responsive to changes in income. Household
consumption nevertheless increased for all groups because of increases in real labour and capital incomes,
through real wage rate rises for all age groups (figure B.1, panel c), and relative increases in the capitalrental price and amount of capital held by households. These increases in income were partly offset byincreased saving and income taxes.
Real GDP increased by 2.0%, and real GNI increased by 2.1%, with increases to real consumption, investment
and government expenditure (including the more immediate effects of improvements in labour productivity inthe ‘school education’ industry, discussed above). Sensitivity testing found that the real GDP increase ranged
from 1.0% to 3.0% under different assumed labour productivity improvements (chapter 4 of this inquiry’scompanion volume ‘Whole-of-economy modelling’). Household wellbeing increased as a result of increased real
incomes (and thus consumption), and increased leisure among some labour groups. Consumption inequality
decreased slightly as labour productivity improvements were shared more broadly across all labour types.

Increasing tertiary education graduates to meet increasing needs for skilled
labour135
The model was used to illustrate the potential effects of measures that would increase the supply oftertiary education graduates to address increasing needs for skilled labour in the Australian economy.
This could, for example, arise from proposed reforms that lift participation in university education andqualification completion rates, with younger age groups being more likely to graduate sooner and hence
benefit from the reforms. 136
The impacts of proposed reforms were simulated by changing the composition of the population toward more
university-educated people among the 15-24 year old group. It was assumed that among 15-24 year old groups,
there was a 10% increase in numbers of people who are university-educated, a 4% fall in those who are
VET-educated, and the remaining compositional shift absorbed by a fall in school-educated people. That is, thetotal number of people in the population remained the same, but they were more highly educated on average.
The increase in supply of university-educated labour resulted in the real wage rates of university-educatedgroups falling (that is, wage rates decreased relative to the economy-wide consumer price index (CPI)). Realwage rates of the university-educated 15-24 year old group fell the most, and real wage rates of older
university-educated groups fell slightly too because producers were able to substitute toward the less scarce
younger university-educated group. This, in turn, resulted in decreases in average consumption by
university-educated people. The real wage rates of school- and VET-educated groups increased because
these labour types were relatively more scarce, and labour of different education levels was assumed to beless substitutable than labour of different age or sex groups. Although the size of the gap in wage rates

135 Referred to as simulation 3 in this inquiry’s companion volume ‘Whole-of-economy modelling’.
136 In the absence of these reforms to increase university-educated labour supply to meet increasing demand for skilled

labour, there would be a shortage of skilled labour at original wage levels and eventually, assuming the economy canadjust, an increase in the market-clearing wages of university-educated labour. This was verified in a separate simulationin which demand for university-educated labour was increased through increasing the factor share associated with
university-educated labour, and reducing that associated with other types of labour, in industry production functions.
146

Stylised simulations of economy-wide effects

decreased between university-educated workers and workers with lower education levels, the wage rates ofuniversity-educated workers were still higher than for other workers.
Industries that used relatively more university-educated labour in their production process (such as
education industries, ‘professional, scientific and technical services’ and ‘health and social services’) were
better able to benefit from the increase in supply of university-educated labour to produce more output atlower prices relative to the economy-wide CPI (figure B.2).137 Other industries tended to experience relative
price increases (figure B.2, panel b), partly because of higher labour costs (arising from substitutions awayfrom more scarce non-university-educated labour toward relatively more costly university-educated labour,and relative wage rises for non-university-educated labour).
Figure B.2 – Estimated changes in real output and output prices by industry due toincreasing tertiary education graduatesa
a. Real output

b. Output prices relative to CPI
0.04

0.20

0.18

0.02

0.16

0.00

% change% change

0.14

0.12
0.10
0.08
0.06

-0.02
-0.04
-0.06

0.04

-0.08

0.02

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG

-0.10

0.00

a. Industry abbreviations: AGRICU – agriculture, forestry and fishing; MINING – mining; ADVMAN – advanced
manufacturing; OTHMAN – other manufacturing; CONSTR – construction; TRANWH – transport and wholesale; RETAIL– retail trade; HOSPIT – hospitality; TECTEL – technology and telecommunications; FINSVC – financial services;
PRFSVC – professional, scientific and technical services; SCHOOL – school education; VETUNI – technical, vocational
and tertiary education; HLTHSS – health and social services; PUBADM – public administration; OTHSVC – otherservices; DWELLG – ownership of dwellings.
Source: Productivity Commission estimates.

Nevertheless, output still increased across all industries due to increased demand (figure B.2, panel a).
Demand from the household sector increased because the rise in consumption for non-university-educatedgroups (due to real wage rate rises) exceeded falls in consumption from university-educated groups, andbecause of the simulated compositional changes (a shift from school- and VET-educated young people on
lower incomes to university-educated young people earning higher incomes means that young people inaggregate enjoy greater consumption, all else equal).

137 In reality for the ‘school education’ industry, the amount of schooling delivered meets population demands (which are

not modelled) and school education is not explicitly priced in the public sector. The simulated changes for this industry
can therefore be interpreted as improvements to the quality of education delivered, at a relatively lower cost. This isdiscussed further above in the simulation examining improvements to school education quality.
147

5-year Productivity Inquiry: From learning to growth Inquiry report

Relative capital rental prices also increased due to increased demand for capital from growth in production, andthe fact that industries that experienced relative price reductions were not used heavily by the investment sector.
Real GDP and real GNI increased by about 0.04% under this simulation, but sensitivity testing found that theeffects varied with changes to the model assumptions. For example, some changes to the size of theassumed increase in university-educated people led to real GDP increases from 0.03% to 0.06% (chapter 4of this inquiry’s companion volume ‘Whole-of-economy modelling’).

Improving tertiary education quality138
The model was used to run two simulations to illustrate the potential effects of recommendations to improve
the quality of tertiary education — one stylised representation of ‘long run’ effects and another of effects inthe ‘very long run’.139• The long run illustrates the economic impacts once quality improvements have resulted in more productive
workers in the age groups that are more likely to graduate (and therefore benefit from improved tertiary
education quality) sooner, via a 2% increase in the labour productivity of university-educated 15-24 and25-34 year old labour.
• In the very long run, all workers that have completed tertiary education will have done so in the improved
system, so it is assumed that the 2% labour productivity improvement applies to all university-educatedlabour types, regardless of age.

Long run
The increase in productivity for university-educated 15-24 and 25-34 year old workers resulted in their real
wage rates (that is, wages relative to the economy-wide CPI) increasing relatively more than other labourgroups. Real wage rates for other university-educated age groups fell slightly on average as the 15-24 and25-34 year old labour groups were preferred due to their increased productivity. Aggregate real wage rates
increased slightly and hours worked fell slightly.
Increased labour productivity meant that industries could produce more output with the same amount of labour.
All industries increased their quantity of output produced. However, output price effects relative to theeconomy-wide CPI varied across industries, reflecting several factors — including relative wage rate changes
due to the increased labour productivity, each industry’s relative use of 15-24 and 25-34 year old workers, andthe change in demand for goods and services. Industries that used relatively more university-educated 15-24
and 25-34 year old workers (such as ‘school education’ and ‘professional, scientific and technical services’)
benefited more from their improved productivity, which led to an overall decrease in their relative prices.
However, industries that used relatively little labour from university-educated 15-24 and 25-34 year old workers(such as ‘other manufacturing’, ‘construction’ and ‘transport and wholesale’), or that relied heavily on capital(such as ‘agriculture, forestry and fishing’ and ‘mining’), experienced a relative increase in their output prices,because the improved labour productivity had less of an effect.
The increase in output across all industries meant an increased need for capital, leading to increased
investment and a larger capital stock. Capital rental prices increased in relative terms as well, due to therelative price of investment increasing.
Households increased their consumption across all commodities in real terms, and real exports and government
consumption also increased. Real GDP increased by about 0.2% and real GNI increase by about 0.3% under this138 Referred to as simulation 4 in this inquiry’s companion volume ‘Whole-of-economy modelling’.
139 It has been assumed in both scenarios that the time horizons were sufficient to allow the capital stock to grow andmove flexibly between industries.

148

Stylised simulations of economy-wide effects

simulation. However, sensitivity testing found that the real GDP effect ranged from 0.1% to 0.5% with changes tothe assumed labour productivity improvement, indicating some uncertainty about these figures. Household
wellbeing (as measured by a combination of consumption and leisure time) increased as households had higher
labour incomes and were able to consume more, and some groups increased their leisure time. The value of the
wellbeing improvement was estimated to be worth about $2.5 billion to households in aggregate in 2018-19
dollars (that is, if this amount was given as extra income instead of the productivity shock, households would be
as well off as they were estimated to be after the productivity shock). Consumption inequality increased slightly as
the benefits of the shock predominantly flowed to university-educated workers, who were generally more highly
paid and initially had higher consumption on average.

Very long run
The increase in productivity across all university-educated workers increased demand for this type of labour
relative to other types, which increased their real wage rates (figure B.3, panel a). The real wage rates of
VET- and school-educated labour also increased, albeit by a smaller amount. The greater real wage
increase for university-educated workers resulted from industries substituting toward more productive
university-educated workers. Hours worked by university-educated labour increased while hours worked
decreased for VET- and school-educated labour (figure B.3, panel b).
Real consumption increased across all individual groups (figure B.3, panel c), with increases in labour andcapital incomes exceeding increases in saving and taxes in real terms. On labour incomes in particular,
university-educated workers saw increased real wage rates and hours worked. VET- and school-educatedlabour types also saw increased incomes and consumption even with a decrease in their hours worked, as
real wage rates for these labour types increased. Similar to the long run simulation, household wellbeing
increased (as both consumption and leisure time for some groups increased), with the improvement valued
at $8.4 billion in aggregate in 2018-19 dollars. There was a slight increase in consumption inequality, as theuniversity-educated labour groups who benefited from relatively larger consumption increases also initially
had higher consumption on average than other groups.
Figure B.3 – Estimated changes in average real wage rate, hours worked and realconsumption by education level due to improved tertiary education in the very long run
a. Average real wage
1.5

c. Real consumptionb. Hours worked

1.5

0.02

% change

0
1.0

1.0

-0.02
-0.04

0.5

0.5

-0.06

0.0

0.0

-0.08

SchoolVET

Uni

SchoolVET

Uni

SchoolVET

Uni

Highest education level
Source: Productivity Commission estimates.

Similar to the long run simulation, output price changes relative to the economy-wide CPI varied. Industries
that saw a relative price increase included ‘agriculture, forestry and fishing’, ‘mining’, advanced
manufacturing’, ‘other manufacturing’, ‘construction’, ‘hospitality’ and ‘ownership of dwellings’, and otherindustries experienced relative price decreases (figure B.4, panel a). Real output increased across allindustries as the increased labour productivity of all university-educated workers meant more output could be149

5-year Productivity Inquiry: From learning to growth Inquiry report

produced with the same level of labour (figure B.4, panel b). More capital was also required to produce thisincreased output, so investment and the capital stock increased, while the relative price of investment andcapital rental increased. Economy-wide, real GDP increased by about 0.8% and real GNI increased by about
0.9% under this simulation. Sensitivity testing found that the real GDP effect ranged from 0.4% to 1.6%
under different assumed productivity improvements.
Figure B.4 – Estimated changes in output prices and real output by industry due toimproved tertiary education in the very long runaa. Output prices relative to CPI

b. Real output
1.2

0.1

1.0

% change

-0.1
-0.2
-0.3

0.8
0.6
0.4
0.2

0.0
AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG-0.4

AGRICUMININGADVMANOTHMANCONSTRTRANWHRETAILHOSPITTECTELFINSVCPRFSVCSCHOOLVETUNIHLTHSSPUBADMOTHSVCDWELLG% change

0.0

a. Industry abbreviations: AGRICU – agriculture, forestry and fishing; MINING – mining; ADVMAN – advanced
manufacturing; OTHMAN – other manufacturing; CONSTR – construction; TRANWH – transport and wholesale; RETAIL– retail trade; HOSPIT – hospitality; TECTEL – technology and telecommunications; FINSVC – financial services;
PRFSVC – professional, scientific and technical services; SCHOOL – school education; VETUNI – technical, vocational
and tertiary education; HLTHSS – health and social services; PUBADM – public administration; OTHSVC – otherservices; DWELLG – ownership of dwellings.
Source: Productivity Commission estimates.

.

150Abbreviations

Abbreviations
ABS

Australian Bureau of Statistics

ACCC

Australian Competition and Consumer Commission

ACL

Australian Consumer Law

ACARA

Australian Curriculum, Assessment and Reporting Authority

AERO

Australian Education Research Organisation

AITSL

Australian Institute for Teaching and School Leadership

AQF

Australian Qualifications Framework

ARC

Australian Research Council

ASQA

Australian Skills Quality Authority

ATAR

Australian Tertiary Admissions Rank

CBT

Competency-based training

CGS

Commonwealth Grant Scheme

CPI

Consumer Price Index

CSP

Commonwealth supported place

DESE

Department of Education, Skills and Employment

DEWR

Department of Employment and Workplace Relations

EFTSL

Equivalent full-time student load

FTE

Full-time equivalentGDP

Gross Domestic Product

GST

Goods and Services Tax

GUG

Good Universities Guide

HALT

Highly Accomplished and Lead Teachers

HECS

Higher Education Contribution Scheme

HELP

Higher Education Loan Program

HERD

Higher Education Research and Development

HEPPP

Higher Education Participation and Partnerships Program

IAT

Institute of Applied Technology

ICL

Income-contingent loan

IRLSAF

Indigenous, Regional and Low-SES Attainment Fund

ITPA

Independent Training Package Assurance151

5-year Productivity Inquiry: From learning to growth Inquiry report

JRG

Job-Ready Graduates [Higher Education Support Amendment (Job-ready Graduates andSupporting Regional and Remote Students) Bill 2020]

JSC

Jobs and Skills Council

MOOCs

Massive open online course

MBGA

Maximum Basic Grant Amount

MFP

Multifactor productivity

NAPLAN

National Assessment Program — Literacy and Numeracy

NSRA

National School Reform Agreement

NASWD

National Agreement on Skills and Workforce Development

NCSEHE

National Centre for Student Equity in Higher Education

NCVER

National Centre for Vocational Education Research

NSC

National Skills Commission

NTEU

National Tertiary Education Union

OECD

Organisation for Economic Co-operation and Development

PBF

Performance-based funding

PCS

Provider Category Standards

PISA

Programme for International Student Assessment

QILT

Quality Indicators for Learning and Teaching

RTO

Registered training organisation

SES

Socio-economic status

SEIFA

Socio-Economic Indexes for Areas

STEAM

Science, Technology, Engineering, the Arts and Mathematics

TAFE

Technical and Further Education

TEQSA

Tertiary Education Quality and Standards Agency

TERS

Teaching Excellence Research Scheme

UAC

Universities Admissions Centre

UK

United Kingdom

US

United States of America

VET

Vocational Education and Training

VFH

VET FEE-HELP

VSLVET Student Loans

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Report no. 100 – 7 February 2023

5-year Productivity Inquiry:
Whole-of-economy modelling
Inquiry report – volume 9i5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

The Productivity Commission acknowledges the Traditional Owners ofCountry throughout Australia and their continuing connection to land,
waters and community. We pay our respects to their Cultures, Country
and Elders past and present.

The Productivity Commission
The Productivity Commission is the Australian Government’s independent research
and advisory body on a range of economic, social and environmental issues affecting
the welfare of Australians. Its role, expressed most simply, is to help governments
make better policies, in the long term interest of the Australian community.
The Commission’s independence is underpinned by an Act of Parliament. Its
processes and outputs are open to public scrutiny and are driven by concern for
the wellbeing of the community as a whole.
Further information on the Productivity Commission can be obtained from theCommission’s website (www.pc.gov.au).

© Commonwealth of Australia 2023

With the exception of the Commonwealth Coat of Arms and content supplied bythird parties, this copyright work is licensed under a Creative Commons Attribution
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the work, as long as you attribute the work to the Productivity Commission (but notin any way that suggests the Commission endorses you or your use) and abide by
the other licence terms. The licence can be viewed at:https://creativecommons.org/licenses/by/4.0.
The terms under which the Coat of Arms can be used are detailed at:www.pmc.gov.au/government/commonwealth-coat-arms.
Wherever a third party holds copyright in this material the copyright remains withthat party. Their permission may be required to use the material, please contact
them directly.
ISSN 1447-1337 (online)
ISSN 1447-1329 (print)
ISBN 978-1-74037-759-1 (set)ISBN 978-1-74037-768-3 (volume 9)
An appropriate reference for this publication is:
Productivity Commission 2023, 5-Year Productivity inquiry: Whole-of-economy
modelling, Vol. 9, Inquiry Report no. 100, Canberra

Publication enquiries:
Media, Publications and Web | phone 03 9653 2244 | email publications@pc.gov.au

ii

Contents

Contents
Prefaceiv

1.

Model structure1

1.1

Individual group decision process4

1.2

Industry production processes

5

1.3

Government decision process8

1.4

Investment and capital processes

8

1.5

The rest of the world9

1.6

Model structure limitations

9

Data sources and parameters

11

2.1

The social accounting matrix

11

2.2

Expenditure, factor incomes, and income tax by individual group

12

2.3

Normalised hours

13

2.4

Other individual group values

14

2.5

Elasticities

15

2.

3.

Simulations and output variables

17

3.1

Summary of simulations

17

3.2

Aggregate output variables

23

4.

Sensitivity testing25

5.

Model equations

29

Attachment A — Review of ‘whole-of-economy modelling’

33

Abbreviations

35

References

37

The Commission’s report is divided into 9 volumes: an overview document (volume 1) that presents ourpolicy agenda, and inquiry content volumes (volumes 2–9) that explain in greater detail the reforms thatmake up the policy agenda, including a modelling appendix. The full report is available from www.pc.gov.au.

iii

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Preface
The Commission used a purpose-built computable general equilibrium (CGE) model to illustrate thewhole-of-economy effects of stylised representations of some proposed reforms.1 While the simulations are
stylised, the value in using the model is its insights on:• how productivity improvements can flow through the economy’s structure, and what the changes are inunderlying economic variables that are driving overall movements in aggregate outputs such as GDP,
gross national income, prices, wages and use of labour• measures relating to the impact of reforms on consumer wellbeing (in monetary terms, for example,
equivalent variation) and inequality (for example, the Gini coefficient)• the differential impacts of reforms across various groups in the economy, at both the individual level (byage, education and gender groups) and the business level (by industry).
However, there are questions that the model is not well placed to answer. CGE models trace the impacts ofparticular shocks over the short or long run but have limited ability to capture the broader aspects of a shock thatare not explicitly defined in the model, such as uncertain spillover effects. If all or many of the inquiry’s
recommendations were implemented, the capacity of the economy to innovate and harness new opportunities
would improve, further lifting long-run growth. These broader impacts can be illustrated using other methods, suchas the simple growth accounting framework that demonstrates the power of exponential productivity growth on
economic growth and living standards outlined in this inquiry’s companion volume Keys to Growth.
This volume first covers the details of the CGE model structure and its limitations (chapter 1), data sources
and parameters (chapter 2), and an outline of the simulations run for the Productivity Inquiry (chapter 3). The
key results from each simulation are presented in the appendices of the relevant companion volumes of thisinquiry. A summary of sensitivity testing results is presented in chapter 4, and simple representations of themodel equations in chapter 5.

1 Consultations, including a workshop in November 2022, were held to receive feedback on the development of themodel and simulation results. The model and results contained in a draft version of this volume were also reviewed by
LY Cao, with the review report attached at the end of this volume. The feedback received through these methods was
greatly appreciated and the Commission thanks participants for their time and engagement.
iv

Model structure

1.

Model structure

The CGE model for the Productivity Inquiry is a static model of the Australian economy with multiple
industries in the production sector and different individual groups within the household sector, which reflect
different combinations of age groups, sexes and education levels. The model structure draws on someelements from the PCNational model (used for example in PC 2022, pp. 42–45) and the illustrative CGE
model used by Hosoe, Gasawa and Hashimoto (2010), but contains greater heterogeneity.
The model’s industries use labour and capital in their production process, where different types of labour areprovided by the different individual groups in the household sector. The government comprises anothersector of the economy, as does investment. The Australian economy interacts with the rest of the world
through the flow of exports and imports, capital income and investment. Figure 1.1 shows a simple
representation of the model structure, including the interlinkages between parts of the economy. The numberof industries, and types of labour and individual groups in this figure are illustrative only.
Furthermore, in a CGE model, one price (the ‘numeraire’) must be determined outside of the model2 — inthis model, the household consumption price index is chosen as the numeraire. All model prices are
expressed relative to the numeraire.
More detailed descriptions of the model structure by each major entity or activity, including choices aroundwhich variables are determined within the model and which are given outside of the model (‘closure’
assumptions), are covered below. Box 1.1 summarises the main closure assumptions in the model, andchapter 5 covers equations illustrating relationships in the model.3

2 This is due to Walras’ law which implies that if all but one market clears, then the last market also clears and its market

clearing constraint is redundant.
3 The model was built using the GAMS software and the equations formulated as mixed complementarity problems. This
formulation allows for explicit pairing between an economic variable and its equation either as an equality or inequality
constraint (Abrell 2017; Murphy, Pierru and Smeers 2016). For example, a wage floor was implemented in somesensitivity testing simulations (chapter 4) as an inequality constraint, with unemployment as its paired variable.
15-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Figure 1.1 – Simple illustration of model structurea

Producers

Rest of world

Use labour and capital

Buys exports

Use domestic and imported commodities

Sells imports

Sell domestic and exported commodities

Provides capital
Receives capital income

Industry 1

Industry 2

Industry 3

Provides savings for investment

Government

Individual groups within household sector
Provide labour and capital
Receive labour and capital income

Taxes andsubsidises production,
sales, household income,foreign capital income
Consumes domestic andimported commodities

Provide savings for investment
Consume domestic and imported commodities
Enjoy non-work activity

Investment
Individual group 1/ Labour type 1

Individual group 2/ Labour type 2

Individual group 3/ Labour type 3

Uses domestic andimported commodities
to produce capitala. Arrows indicate value flows originating from one sector and flowing to another sector. For example, the grey arrowlinking producers to individual groups indicate payments flowing to individual groups for use of labour and capital, and to
producers for purchases of commodities.

2Model structure

Box 1.1 – Summary of closure assumptions
Closure refers to the choice of variables that are determined within the model (endogenous variables)
and those that are given outside of the model (exogenous variables). Key closure assumptions in themain model simulations are listed below. Some of these assumptions are changed in sensitivity testing
analysis (chapter 4).
• The rate of return to capital (defined as the rental price of capital relative to the price of investment) is
exogenous. Capital is mobile across any industry, and the size of the capital stock is determinedthrough demand from the production sector, given the rental price. This implies a long-run assumption
in which the size of the capital stock is flexible.
• Investment is determined through its relationship with the capital stock — if the capital stock increases,
more investment is required to maintain that capital stock. Domestic saving and the domestic capitalstock endogenously adjust to meet the level of investment and capital required.
• The quantity of foreign investment and the foreign capital stock are exogenous. This assumes that theavailability of foreign investment and foreign ownership of capital are limited, and not affected bydomestic variables or policies. It also means that the current account deficit (which equals foreign
investment inflows) is fixed relative to the price of investment, and movements in the balance of tradeare also limited.
• The international prices of imported commodities are exogenous. This implies that Australia takes
world prices of imports as given. The total quantity of imports is determined through demand fromusers at given prices.
• Foreign demands for Australian commodities are based on fixed downward sloping demand curves.
This assumes that Australian exporters have some market power in the world market.
• Government expenditure is determined through its relationship with GDP — the size of government
spending grows linearly with GDP. Government spending is assumed to have no effect on the model’s
productivity parameters.
• Government tax rates are exogenous, except for household income tax rates that endogenously
adjust to balance the government budget. The amount of household income tax enters as a lump sum
into individual group decision making processes in a non-distortionary way.
• Each individual group has a fixed time endowment that can be allocated between labour and leisure.
Wage rates are determined through market clearing of individual group labour supply decisions (via autility maximisation process) and industry labour demand decisions (via a cost minimisation process).
Any type of labour supplied can be used across any industry (that is, labour is perfectly mobile).

35-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

1.1

Individual group decision process

The household sector is split into individual groups to enable analysis of reforms that may affect different
groups in different ways. For example, these groups can represent individuals that are likely to be affecteddifferently by proposed reforms to schooling and tertiary education (chapter 3). Simulated shocks to the
productivity of industries can also have differential effects on these groups depending on the composition oflabour used by the industries. Individuals are grouped according to their combinations of:• age group — 15-24, 25-34, 35-44, 45-54, 55-64, 65+• gender — male, female• highest education level — ‘Up to Year 12 or Cert I/II’, ‘VET Cert III/IV or Diploma’, ‘Bachelor degree orhigher’ (or school-, VET- and university-educated for simplicity).
Figure 1.2 illustrates the nested decision process for individual groups to consume commodities (goods andservices) and supply labour. Individual groups seek to maximise their utility, which is a constant elasticity of
substitution (CES) function of ‘leisure’ (any time not spent in work) and a ‘composite’ consumption good (abundle of commodities they consume), subject to their budget constraint and a time constraint.4 The budget
constraint comprises labour and capital income, less saving and income taxes, to fund consumption. Saving
and income taxes enter the budget constraint in a non-distortionary way as lump sum values. The time
constraint allocates a fixed time endowment between leisure and hours worked.
Individual groups also choose how much of each household composite (of domestic and imported
commodities) they consume, by minimising their expenditure to meet a given quantity of the composite
consumption good (determined from the above utility maximisation problem), via a CES function.

4 The model includes the option of a wage floor, which can drive a wedge between hours actually worked and available

labour, creating unemployment endogenously. A wage floor can illustrate the effects of wages that are sticky downwards,
for example due to long-term contracts or labour market rigidities. The wage floor is used to test the sensitivity of somemodelled scenario results. It is implemented via an intermediate household decision, where individual cohorts firstchoose how much they would like to work, given prevailing wages and prices. If there is a binding wage floor, labour
supply will exceed labour demand, inducing unemployment.
4Model structure

Figure 1.2 – Individual group decision processa,bIndividual group decision process
Domestic
commodity 1

Importedcommodity 1

Domestic
commodity 2

Importedcommodity 2

Domestic
commodity …

Importedcommodity …

CES or Leontief

CES or Leontief

CES or Leontief

Household composite
commodity 1

Household composite
commodity 2

Household composite
commodity …

Sum of all group demands forhousehold composite
commodity 1

Sum of all group demands forhousehold composite
commodity 2

Sum of all group demands forhousehold composite
commodity …

Individual group 1 –consumption 1

Individual group 1 –consumption 2

Individual group 1 –consumption …

CES
Time constraint
Individual group 1 –composite consumption

Leisure time

Labour type 1 –hours worked

CES
Utilitya. Blue text describes relationships between different components of this diagram. Grey shading indicates a component
that is subject to product taxes. Dashed arrows indicate that only some components of a sum are detailed in the diagram.
Grey arrows indicate that market clearing conditions balance demand and supply. b. A CES relationship was used tocreate composites of domestic and imported commodities, and a Leontief relationship was used where there were noimports of a commodity in the database.

1.2

Industry production processes

The model has 17 industries on the production side (listed below), based on the main industries of interestfor the inquiry’s simulations (for example, ‘school education’ and ‘technical, vocational and tertiary education’
were separated due to separate reforms simulated for school education and higher education). Some
industries were also separately identified due to their more distinctive production or expenditure structures(for example, construction is heavily used by the investment sector):
1. Agriculture, forestry and fishing
2. Mining55-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

3. Advanced manufacturing5
4. Other manufacturing
5. Construction
6. Transport and wholesale
7. Retail trade
8. Hospitality
9. Technology and telecommunications6
10. Financial services
11. Professional, scientific and technical services
12. School education
13. Technical, vocational and tertiary education
14. Health and social services
15. Public administration
16. Other services7
17. Ownership of dwellings.
Figure 1.3 illustrates the nested production process for a given industry. Inputs are used to create outputs ateach stage of the process via a cost minimisation decision for given levels of output, subject to assumed
CES, constant elasticity of transformation (CET) and Leontief production functions.
The two factors of production used are capital and labour, the quantity of which are both flexible. Capital inputs
and each labour type input are also perfectly mobile; that is, they can be used across any industry (there are noindustry-specific labour types or capital). However, each industry has their own production functions todetermine the composition of labour types and composition of labour and capital used.8
Alongside these factors of production, producers in each industry use intermediate inputs to produce industry
outputs. Both domestic and imported commodities are combined to form composites of intermediate inputs.
Across the production functions for creating composite labour, composite factors (value added, combining
labour and capital), and industry output, there were productivity parameters included to allow adjustments tolabour-augmenting technical change, multifactor productivity, and input-neutral technical change
respectively. These parameters were adjusted in various model simulations (chapter 3).

5 Industries that comprise ‘advanced manufacturing’ were identified with reference to industries listed in a study ofAustralian advanced manufacturing (DIIS and IP Australia 2017, pp. 85–86). These include industries covered under‘basic chemical manufacturing’, ‘cleaning compound and toilet preparation manufacturing’, ‘transport equipment
manufacturing’ and ‘machinery and equipment manufacturing’.
6 ‘Technology and telecommunications’ includes ‘internet service providers, internet publishing and broadcasting, websearchportals and data processing’, ‘telecommunication services’ and ‘computer systems design and related services’.
7‘Other services’ include energy and utilities, rental and real estate services, administrative and support services, arts
and recreation, repair and maintenance, and personal services. These services were grouped together for the model
because they were not separately considered to be key industries of interest for the simulation scenarios.
8 There are two CES processes for creating composite labour for each industry. The first involves combining age-sex labour
combinations to create a composite labour by education level. The second involves combining each education-level labour
composite into a single industry composite labour. Note that while producers are not actually able to discriminate in their hiring
choices by age group or sex, assuming imperfect substitution of labour by age group and sex in the model provides a simple
way of reflecting differences that exist due to people’s preferences for working in certain industries.
6Model structure

Figure 1.3 – Industry production processesa,b,c

Industry production processes
Labour type 1 – hours worked

Labour type 2 – hours worked

Labour type … – hours worked

Sum of all demands forlabour type 1

Sum of all demands forlabour type 2

Sum of all demands forlabour type …

Industry labour type 1

Industry labour type 2

Industry labour type …

CES
Industry composite labour

Domestic
input 1

Domestic
input 2

Domestic
input …

Imported
input 1

Imported
input 2

Imported
input …

CES
Industry
composite
input 1

Total capitalIndustry capital

CES

CES

CES

Industry
composite
input 2

Industry
composite
input …

Sum of domestic users’
demands for industry’s
outputIndustry value
added

Leontief
Industry output = CET composite
CET

Export supply ofindustry’s output

Domestic supply ofindustry’s output

Foreign demand forindustry’s exporta. Blue text describes relationships between different diagram components. Grey shading indicates a taxed component(either a product tax or production tax). Dashed arrows indicate that only some components of a sum are detailed. Greyarrows indicate that market clearing conditions balance demand and supply. b. The purple box is a simplified representationof the creation of composite labour in each industry. In the model, there are two CES nests in this process. The first involves
combining age-sex labour combinations to create a composite labour by education level for each industry. The second
involves combining each education-level labour composite into a single industry composite labour. c. The ‘ownership ofdwellings’ industry does not employ labour in the data, so is only produced using capital and intermediate inputs.

75-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Producers also make choices about whether industry outputs are exported or used domestically via a CETfunction. Given the relatively broad industries used in the model, this decision could arise because thecomposition of more granular commodities (not separately modelled) exported by an industry may bedifferent from the composition of granular commodities sold domestically.

1.3

Government decision process

Figure 1.4 illustrates the government decision process. There is one government entity, which purchases
composite commodities (made up of domestic and imported commodities) according to a Cobb-Douglas
consumption function, subject to its budget constraint. The government budget constraint comprises net tax
revenues (less subsidies) from production (including industry-specific taxes levied on the value of production,and taxes levied on sales with rates that differ by the commodity and the buyer of that commodity),
household income taxes and foreign capital income taxes. The Cobb-Douglas relationship implies that
expenditure shares are constant — that is, the government allocates a fixed share of its total expenditure to
consumption of each commodity. The total nominal value of government consumption is also assumed to bea fixed share of nominal GDP, so grows with GDP growth.
Government tax rates are fixed, except for household tax payments, so revenue largely moves in line withthe various tax bases. Household tax payments adjust to balance the government budget constraint. Eachindividual group’s tax rate scales according to the total value of tax the government requires under thesimulation relative to the base scenario.
Figure 1.4 – Government decision processa,bGovernment decision process
Domestic
commodity 1

Importedcommodity 1

Domestic
commodity 2

Importedcommodity 2

Domestic
commodity …

Importedcommodity …

CES or Leontief

CES or Leontief

CES or Leontief

Government
composite commodity 1

Government
composite commodity 2

Government
composite commodity …

Cobb-Douglas
Government consumption

a. Blue text describes relationships between different diagram components. b. A CES relationship was used to createcomposites of domestic and imported commodities, and a Leontief relationship was used where there were no imports ofa commodity in the database.

1.4

Investment and capital processes

The size of the capital stock is assumed to be variable, while the rate of return to capital (defined as the price ofcapital relative to the price of investment) is fixed. It is also assumed that investment and capital relationships arein steady state, and that the ratio of real investment (new capital) to real capital (the capital stock) is fixed — that
is, a fixed quantity of investment is required to keep the capital stock constant due to capital depreciation.
8Model structure

Figure 1.5 illustrates the investment process. The investment sector uses domestic and imported commodities to
produce composite inputs, which it then uses in fixed shares to invest in capital (via a Leontief function).
Capital is owned by domestic and foreign investors, and savings from individual groups and foreign investors
are used to fund investment activity. Real foreign investment and the capital stock owned by foreigners are
assumed to be fixed. This means that only savings by domestic investors adjust to meet the value ofinvestment activity, and similarly for the capital stock. Each individual group’s saving rate and capital tosaving ratio scale according to the total value of domestic saving and capital required under the simulation
relative to the base scenario.
Figure 1.5 – Investment processa,bInvestment process
Domestic
input 1

Imported
input 1

Domestic
input 2

Imported
input 2

Domestic
input …

Imported
input …

CES or Leontief

CES or Leontief

CES or Leontief

Investment
composite input 1

Investment
composite input 2

Investment
composite input …

Leontief
Investment activity

a. Blue text describes relationships between different diagram components. Grey shading indicates a component that is
subject to product taxes. b. A CES relationship was used to create composites of domestic and imported commodities,
and a Leontief relationship was used where there were no imports of a commodity in the database.

1.5

The rest of the world

Australia interacts with the rest of the world via trade in commodities, foreign investment and supply of
foreign capital. Foreign supplies of imported commodities are assumed to be perfectly elastic at a given
international price. The exchange rate changes relative to the household consumption price index. Total
Australian demand for an imported commodity is the sum of demands from household, production,
government and investment sectors. Foreign demands for Australian commodities are based on downward
sloping demand curves. Total outflows from Australia to the rest of the world equal total inflows.

1.6

Model structure limitations

The model structure means that it is not able to produce detailed results of some aspects of the economy.
For example, it is not able to comment on effects across more granular industry groupings (than the 17 thathave been explicitly defined in the model), different states or regions of Australia, different types of capital,
occupations, or dynamic effects over time. The measure of hours worked also does not differentiate betweenchanges due to more people gaining employment or existing workers working more hours.
Other simplifying assumptions may also have an effect on model results. For example, the main model
assumptions do not contain ‘fixed factors’; that is, factors that are assumed to be in fixed supply (such as
95-year Productivity Inquiry: Whole-of-economy modelling Inquiry reportland, which is especially important for agriculture and mining). Inclusion of a fixed factor would involve
assuming some portion of payments currently allocated to capital or labour are instead allocated to the fixedfactor. Allocating some share of capital to land as a fixed factor would mean that the production sector has
more limited scope to expand, and some aggregate effects in the economy may be smaller than seen under
the current model, because land cannot grow via investment. Some of the effects of constraining factors of
production are examined as part of sensitivity testing (chapter 4).
In addition, it is assumed that the rate of return to capital, foreign capital and real foreign investment are fixedin the model. It is possible that some policy reforms that improve productivity could increase rates of returnand induce greater foreign investment. These dynamics are not examined in this model.
Capital and investment are also assumed to be in steady state, with investment being equal to depreciation.
However, data on capital and investment for a particular year might not reflect a steady state economy —due to mismatches between the timing of investment decisions and depreciation, or because investment andthe capital stock are growing over time. The model and use of data for calibrating parameters (chapter 2)
does not account for this possibility. Therefore the size of the investment sector (and use of inputs used tocreate investment) may differ from an actual steady state economy.
Furthermore, an attribute of the CES function, which is used in individual group decisions to consumecommodities, is that expenditure elasticities are unitary — a 1% increase in income or expenditure isassociated with a 1% increase in demand for commodities. Past research suggests that this is unlikely to be
the case; for example, people may dedicate some amount of expenditure to a bundle of necessities first,
irrespective of income, before choosing to spend their remaining income on other goods and services(Gharibnavaz and Verikios 2018). The CES functional form means that, for industries that supply
commodities for which demand usually rises with increasing income levels, simulated growth may be lower
than it otherwise would be.
Given model structure limitations, along with the stylised way in which simulated shocks have been
implemented (chapter 3), the simulation results should not be interpreted as being the absolute effects ofreform. Nevertheless, the model structure provides a tractable means of illustrating some whole-of-economy
effects of the stylised scenarios.

10Data sources and parameters

2.

Data sources and parameters

The initial values of the model’s variables (of prices and quantities for example) and the estimation ofparameters (such as share parameters in Cobb-Douglas functions) require a database that reflects theAustralian economy. The values, prices and quantities in the database are then used to solve for unknown
model parameters through a process known as ‘calibration’. As model databases usually contain data on
values of production and expenditure (equal to prices multiplied by quantities), rather than prices or quantities
separately, it is conventional to assume that prices are normalised to be one. This allows quantities to be
estimated as values divided by prices. Where there are indirect taxes, tax-exclusive prices are normalised to beone, and then adjusted by applicable tax rates to estimate ‘purchaser prices’, in order to determine quantities.
This convention has been applied in the calibration process for most parameters in this model.
In some functions, there are more unknown parameters to solve for than there are available data on prices andquantities. Consequently, some model parameters have to be assumed to allow the other model parameters to
be calibrated — for CES functions, usually the elasticity of substitution is assumed or drawn from the literature.
This chapter describes the data used to form the model’s database, and the elasticities assumed in the model.

2.1

The social accounting matrix

An aggregate social accounting matrix (SAM) was developed to form the backbone of the model’s database.9
This contains aggregate flows between the model industries, commodities, capital and labour, the household
sector, government sector, investment sector, and the rest of the world. This was supplemented by an
Input-Output (IO) table that contains more detail on use of domestic and imported commodities and product taxes.
The ABS National Accounts IO tables were the main data source for the model’s SAM. The tables containdata that ‘provide detailed information about the supply and use of products in the Australian economy, andthe structure of and inter-relationships between Australian industries’ (ABS 2021a). This data is categorised
into 114 ‘Input Output Industry Groups’, which were then aggregated to the model’s 17 industries.
Data from 2018-19 was used because production activity in the more recent 2019-20 data may reflect the
impacts of COVID in 2020. For consistency, 2018-19 sources of data were used for other values in themodel’s database where available. 2018-19 data was not available for some sources needed to estimate
variables by individual group (described below), in which case data from the closest year to 2018-19 wasused, and adjusted for the 2019 population.

9 A SAM records data on transactions (inflows and outflows) between economic agents in an economy. It is a squarematrix where each row and column represents an activity, commodity, factor or institutional sector. Each cell shows thepayment from the column account to the row account. The SAM must be balanced — that is, all inflows must equal
outflows for a particular account. The structure of the SAM (that is, the economic agents included and the flows betweenthem) must also concord with the CGE model’s structure and equations.
115-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

The value of foreign capital income was informed by data in the Balance of Payments (ABS 2021b). For
other cells in the aggregate SAM where the values were not given in the ABS IO tables (such as householdincome tax payments and savings), values were calculated as the remainder of the row or column total toensure the SAM was a balanced matrix.
As described in chapter 1, the model’s household sector is split into individual groups or labour types — forexample, income and expenditure differ by individual group — which is not reflected in the aggregate SAM.
Additional data sources were used to reflect this heterogeneity in the model database (described below). The
heterogeneity was achieved by calculating shares attributable to labour types and individual groups, whichwere then used to apportion the values in the SAM. The sums across labour types and individual groups
must equal the corresponding cells in the aggregate SAM, to ensure that the SAM remains balanced.

2.2

Expenditure, factor incomes, and income tax by
individual group

Expenditure by individual group
Each individual group within the model consumes a proportion of total household consumption ofcommodities. Data from the 2015-16 Household Expenditure Survey (HES) (ABS 2017) was used toestimate these proportions.
To estimate person-level expenditure, household expenditure was apportioned to each person over 15 years
old in the household according to their contribution of disposable income to the household. This wasnecessary as the expenditure data in the HES is collected at a household level, but the model’s individual
groups are based on person-level characteristics.
The amount of expenditure on each industry in the model was estimated by mapping HES expenditureclassifications (which use the Household Expenditure Classification) to the 17 model industries. This wasdone using concordances and information in IO tables on production of commodities by industry. Negative
expenditures in the HES, arising for example from sales of cars and dwellings, were also removed as theinclusion of these sales is inconsistent with the definition of expenditure in the model.
The person-level expenditures by industry were then used to calculate the proportion of expenditure by eachindividual group in the household sector of the model (adjusted to the 2019 population). These proportions
were applied to aggregate household expenditure by industry in the SAM to estimate the expenditure foreach individual group.

Labour and capital income, and income tax by individual group
The amounts of labour income received by each individual group working in each industry, as well as capitalincome received and income tax paid by each group in the model, are based on proportions calculated using
data from the 2017-18 Survey of Income and Housing (SIH) (ABS 2019b).
The method used to calculate the proportions for each variable in the model was essentially the same, butdifferent variables from the SIH were used. For example, for income tax paid, the aggregate weighted
income tax paid and the share of the total paid by each group was calculated and adjusted to the 2019
population. These proportions were then applied to aggregate household income tax in the SAM to estimate
the amount of tax paid by each group. A similar process was undertaken to estimate labour and capitalincome for each group in the model.

12

Data sources and parameters

2.3

Normalised hours

Normalised time endowment
Each individual group in the model has an exogenous time endowment, representing the total amount oftime they can choose to allocate between work and leisure activities. These time endowments werenormalised to a value of 1 per person in the group’s population. Individual group populations were based on
Australian demographic statistics on the Estimated Residential Population at June 2019 (ABS 2019a).
Normalising total time per person to 1 means that changes to population size can be easily interpreted interms of numbers of people, and it allows wage rates (calibrated from normalised hours worked below) to be
more easily compared across individual groups because they are in terms of the same time units.

Normalised hours worked
A range of values have been used in the literature to represent the ratio of hours worked to total time
available (usually at the population level rather than at an individual group level). Parameters range fromabout 0.3 to 0.9 in different models (based on Boeters and Savard 2013, p. 1654; Dixon and Nassios 2019,
p. 7; Hinson, Wende and Womack 2020, p. 24; Turnovsky 2002, p. 1774), which do not usually imply a totalof 24 hours per day or a standard work week of 40 hours. Values are sometimes chosen to achieve plausible
labour supply elasticities. Boeters and Savard (2013, p. 1653) argue that the ratio should be such that theincome elasticity of labour supply is within an empirically plausible range.
The parametrisation of hours worked in this model assumes a ratio of total hours worked to total time
available in the population of 0.5. That is, half of potential time available is spent working, while the other halfis spent on leisure activities. This determines total normalised hours worked across the population.
Normalised hours worked at the individual group level was then determined using estimates from the2017-18 SIH (ABS 2019b) on the share of total hours worked attributed to each group (adjusted to the 2019
population). These shares were applied to population normalised hours worked in order to calculate
normalised hours worked for each group.
Using this method, the ratio of hours worked to total time varies greatly across individual groups, ranging up
to about 0.9 for some prime working age groups, and down to about 0.1 for retirement age groups. The
implied income elasticities of labour supply10 also vary greatly across groups, with an aggregate elasticity of
about -0.5. This is larger in magnitude than the plausible value suggested in the literature of about -0.1,
though is similar to plausible values suggested for lone parents (Boeters and Savard 2013, p. 1654;
Giesecke et al. 2021, p. 5934). An alternative approach to determining the ratio of hours worked to total time,that achieves a more plausible income elasticity of labour supply, is discussed below.
The implied wage elasticities of labour supply differ across individual groups as well, with labour supply
responses tending to be higher for women and for less educated groups, and an aggregate elasticity of
about 0.2. These patterns across sex and education level are consistent with the literature, and theaggregate elasticity is within ranges in other studies of about 0.1 to 0.3 on average across men and women(based on estimates cited in Dandie and Mercante (2007, pp. 37–39) and Dixon and Nassios (2019, pp. 9–

10 Note that the income elasticity of labour supply is not the same as the wage elasticity of labour supply, which is

discussed subsequently. The income elasticity of labour supply is calculated as the change in labour supply with respect
to a change in non-labour income by an amount that would increase total disposable income (from labour and non-labour
sources) by 1% if labour supply did not react (Boeters and Savard 2013, p. 1653).
13

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report10)), but is higher than the elasticities of slightly less than 0.1 that were calibrated in an Australian CGE
study (Dixon and Nassios 2019, p. 9).
In the calibration process, using data on normalised hours worked (a quantity variable) means that wage rates (aprice variable) are estimated by dividing labour income values by normalised hours worked for each individual
group, rather than being normalised to one like other prices. Calibrated wage rates per normalised hour werehigher for men and more highly educated groups, consistent with actual data on the Australian economy.

Normalised time and hours worked for sensitivity testingAn alternative approach to determining the ratio of hours worked to total time was also examined, withdiscussions of simulations using this approach covered in the sensitivity testing chapter (chapter 4). Under
this approach, a ratio of hours worked to total time was assumed in order to produce income elasticities oflabour supply closer to the range suggested in the literature. It was also assumed that women had larger
labour supply responses than men, and that school-educated groups had larger responses than more highly
educated groups.11 Total time available to each cohort was determined by applying the assumed ratios to theindividual group-level normalised hours worked from the previous approach.
Using this method, income elasticities of labour supply ranged from about -0.08 for more educated men
to -0.15 for less educated women, with an aggregate elasticity of about -0.10, which is similar to thatsuggested in the literature, noted above. Elasticities of labour supply with respect to wages were relatively
low, with an aggregate elasticity of about 0.02 (which corresponds more closely to elasticities for married
men in the literature cited above).

Normalised unemployed hours for sensitivity testing
The primary model simulations assume that there is no unemployment, and that labour markets fully clear.
The existence of unemployment was assumed in some sensitivity testing simulations (chapter 4). In thesesimulations, an initial value of normalised unemployed hours was required for each individual group. Detailed
Labour Force Survey data for 2018-19 (ABS 2022a) was used to estimate these values. Available
information on unemployment by age-sex-education group was used to inform how hours sought (available
only by age and sex) might be distributed across different education levels. To then calculate normalised
unemployed hours, the ratio of hours worked to hours sought was estimated for each group, and applied tonormalised hours worked.

2.4

Other individual group values

The value of saving by each individual group was calculated as a remainder from individual group income
and expenditures. For some individual groups (typically younger and female groups), the value wasnegative, likely because they tend to be living in households where higher income earners supplement their
proportional household spending. The interpretation in the model is such that some ‘saving’ bypositive-saving groups is transferred to negative-saving groups so that the latter groups can consume more.
The sum of individual group savings equals household savings in the aggregate SAM.

11 As cited in Giesecke et al. (2021, p. 5934), past research suggests that income elasticities of labour supply for married

women are more negative than for married men, and elasticities for lone parents are more negative than for couple
families. Lone parents have also been found to have lower levels of education on average (ABS 2007).
14

Data sources and parameters

An initial quantity of utility is also required for each individual group. Utility is a conceptual construct, and is
not observable in data. Initial utility was normalised to be 1 per person in each group, which implies that each
person’s utility is equally important to begin with. Changes in utility values were converted to equivalentvariation estimates (expressed in monetary terms) for ease of interpretation in the analysis of simulations(chapter 3).

2.5

Elasticities

Table 2.1 outlines the elasticities used in the model, including the values used in the base model and thoseused in sensitivity testing (chapter 4). The elasticities were informed by the literature and existing models
where possible, and tested at a technical workshop with external CGE modellers. Elasticities for which there
was greatest uncertainty were sensitivity tested.
Table 2.1 – Assumed elasticities
Parameter

Base value

Sensitivity
testing

Comments and sources

Individual groups in household sector
CES elasticity of
substitution between
consumption andleisure1.1

None

Base value based on Dixon and Nassios(2019).

CES elasticity of
substitution between
composite
consumption
commodities

0.5

0.3 to 0.7

Hinson, Wende and Womack (2020);
Murphy (2018)

CES elasticity of
substitution between(composite) labourand capital

0.5

0.3 to 0.9

Base value based on Hinson, Wende and
Womack (2020).

CES elasticity of
substitution between
different types oflabour4 (by age-sex)

Background research included: Agbahey,
Siddig and Grethe (2020); Boeters andSavard (2013); Fox (2002); Qi (2014)

Industry production

Background research included: PCNationalmodel (unpublished); Bullen et al. (2021);
Cheong and Sonnenschein (2012); Gechert
et al. (2019); Kopecna, Scasny and Recka(2020); KPMG Econtech (2010);
Independent Economics (2015); Murphy(2018); Sanchez (2004)

3 (by education)

2.0 to 6.0 (byage-sex)

Values based on feedback from modelling
workshop participants.

1.5 to 5.0 (byeducation)

Background research included: Autor(2018); Blankenau and Cassou (2011);
Cheong and Sonnenschein (2012); De
Giorgi (2013); Ghosh (2018); Guisinger(2020); Havranek et al. (2020);
Jerzmanowski and Tamura (2020); KPMG

15

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry reportParameter

Base value

Sensitivity
testing

Comments and sources
Econtech (2010); Merette (2007); Murphy(2018)Trade
CES elasticity of
substitution between
domestic andimported commodities— for household,production,
government andinvestment sectors

1.12 (agriculture, forestry andfishing)None3.42 (mining)

Values based on KPMG Econtech (2010)
and feedback from modelling workshop
participants.
Background research included: PCNationalmodel (unpublished); Cheong andSonnenschein (2012); Clements, Mariano
and Verikios (2020); Delahaye and Milot(2020); Go (1994); Hinson, Wende and
Womack (2020); Sanchez (2004);
Independent Economics (2015); Hertel andvan der Mensbrugghe (2019); Verikios et al.
(2021)

2.12 (advanced manufacturing)
2.69 (other manufacturing)
0.25 (transport and wholesale)
0.30 (hospitality; technology
and telecommunications;professional, scientific andtechnical services; otherservices)0 (all other industries)

CET elasticity oftransformation
between exports anddomestic commodities

2.5

Price elasticity ofexport demand-3 for industries where
None
Australia has moreprice-setting power (agriculture,
forestry and fishing; mining;
advanced manufacturing;transport and wholesale;
hospitality; school education;technical, vocational andtertiary education)

Value based on feedback from modelling
workshop participants.
Background research included: Cheong andSonnenschein (2012); Go (1994);
Independent Economics (2015); KPMG
Econtech (2010); Verikios et al. (2021);
Warr and Lapiz (1994)-4 for other industries

16

None

Values based on feedback from modelling
workshop participants.
Background research included: Adams,
Dixon and Horridge (2015); Hinson, Wende
and Womack (2020); Independent
Economics (2015); KPMG Econtech (2010);
Verikios et al. (2021)

Simulations and output variables

3.

3.1

Simulations and output variables

Summary of simulations

This chapter provides a summary of the simulations run for the Productivity Inquiry. The modelling shows
how stylised representations of select reforms could flow through the economy given the defined
relationships between the various sectors of the economy in the model.
Table 3.1 lists the modelled scenarios, while the key results from each simulation are presented in the
appendices of the relevant companion volumes of this inquiry. Shocks were dimensioned based on
estimates from the literature where possible and were tailored for the specific scenarios modelled. Sensitivity
testing was undertaken given the significant uncertainty in potential shock sizes and the relevance of theliterature. Depending on the nature of the scenario, productivity shocks were implemented as an
improvement in either:• the input-neutral technical change parameter, which results in all production inputs (labour, capital andintermediate inputs) being used more productively such that more output can be produced using the samelevel of input• the multifactor productivity parameter, which results in labour and capital being used more productively• the labour-augmenting technical change parameter, which results in labour being used more productively.
The scenarios do not include modelling of the costs of implementing reforms (which could include, forexample, changes in the use of intermediate inputs, changes to fiscal budgets, adjustment costs). These
costs are also highly uncertain and depend on the specifics of the implementation process. Costs and otherconsiderations in reform implementation are discussed in other volumes of this inquiry.
The results from one scenario should not be directly compared with another, as there are significantly
different levels of confidence in the size of the potential reform impact and/or the ability to represent thereform in the model.

175-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Table 3.1 – Summary of simulations
ReportvolumeInnovation
for the 98%,
appendix A

Australia’s
data anddigitaldividend,
appendix B

18

Scenario description

Shocked parameter

Size of shockSensitivity testingvalues[1] Increasing productivity
through better diffusion of
new business models,
technologies, management
capabilities, and data use[1a] Input-neutral technical change
parameters were increased for eachindustry (excluding ‘ownership ofdwellings’) in 16 separate simulations

1%

None

[1b] Input-neutral technical change
parameters were increased for theabove industries in a single simulation

1%

0.5 to 1.5%

[2] Increasing productivity inregional and remote areas
through better access todigital infrastructure, leading
to more uptake of technology
and data tools

Multifactor productivity parameters
were increased for the ‘mining’ and‘agriculture, forestry and fishing’industries

0.5%

0.2 to 1%

Rationale
Assumed for illustrative purposes
only.

A meta-analysis suggests that a
10% increase in use of informationand communication technologies(ICT) is associated with a 0.5%
increase in output (Cardona,
Kretschmer and Strobel 2013,
pp. 118–119). For illustrative
purposes in this shock, it was
assumed that the improvement indigital infrastructure in regional andremote areas would lead to such anincrease in ICT use. The ‘mining’and ‘agriculture, forestry andfishing’ industries were shocked, as
they have much higher shares oflabour (as a proxy for output) inouter regional and remote areas,
based on analysis using 2016
Census data (ABS 2016b).

Simulations and output variables

ReportvolumeFromlearning to
growth,appendix B

Fromlearning to
growth,appendix B

Fromlearning to

19

Scenario description

Shocked parameter

Size of shock[3] Changing the compositionof labour towards more
highly-educated workers (tobetter meet labour market
needs/shortages)

Among 15-24 year old groups, there
was a change in population
composition by education level

10% increase in number ofuniversity-educated people[4] Increasing the productivityof skilled workers by
improving tertiary education
quality – long run and very
long run simulations[5] Increasing labour
productivity of the school
industry by better use of
curriculum resources to saveSensitivity testingvaluesRationale

8 to 12% increase in
number ofuniversity-educated

Assumed for illustrative purposes
only, with reference to projectionsof employment growth by skill level(NSC 2022).

[4a] Improvements will take time as2%people go through the education
system and enter the workforce, andwill likely affect younger workers first. In
this long run simulation,
labour-augmenting technical change
parameters were increased foruniversity-educated labour aged 15-24
and 25-34

1 to 4%[4b] In the very long run, alluniversity-educated workers will havebeen educated in the improved system.
In this simulation, labour-augmenting
technical change parameters wereincreased for all university-educatedlabour groups

2%

1 to 4%

Based on a study (Braga,
Paccagnella and Pellizzari 2016,
p. 803) that found that a professor
who is one standard deviation
better increased students’ earnings
by about 5.4%, or about 5.5% of
average earnings. The shock size
was chosen to reflect that
improvements in professor quality
across the tertiary educationindustry would likely be less than
one standard deviation.

[5a] The short run benefit wasmodelled by increasing thelabour-augmenting technical change
parameter in the ‘school education’3%

2 to 4%4% fall in number of
VET-educated people
Decrease inschool-educated so that
15-24 year old populationis unchanged

The short run benefit was based on
research that estimated that teachers
would save about 3 hours per weekfrom a centralised resources (Hunter,5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Reportvolumegrowth,appendix B

20

Scenario description

Shocked parameterteachers’ time and improvepractices, as well as better
integration of technology
within classrooms – shortrun, long run and very longrun simulationsindustry. Labour use in the ‘school
education’ industry was assumed to be
fixed. The capital stock was also
assumed to have had time to change(consistent with other model
simulations)

Size of shock[5b] In the long run, younger workers
will be the initial group of schoolleavers benefiting from teaching
improvements. This was simulated byincreasing labour-augmenting technicalchange parameters of 15-24 year old
workers. The continued impact ofimproved labour productivity of workers
in the school industry was also
included (from scenario 5a). Labour
use in the ‘school education’ industry
was assumed to be fixed.

3% for school industry[5c] In the very long run, all workers
that have completed school will havedone so in the improved system.
Labour-augmenting technical change
parameters of all workers wereincreased to simulate these effects.
The continued impact of improved
labour productivity of workers in theschool industry was also included (fromscenario 5a). Labour use in the ‘school

5% for school industry

2% for 15-24 year oldgroups
5% for 15-24 year oldgroups in the school
industry

2% for all other workers

Sensitivity testingvalues2 to 4% for school
industry
1 to 3% for 15-24 year
old groups
3 to 7% for 15-24 year
old groups in school
industry

3 to 7% for school
industry
1 to 3% for all otherworkers

Rationale
Haywood and Parkinson 2022,
p. 27). This was converted into a 3%
increase in school labour productivity
by assuming time gained would bespent on teaching (with teaching
hours based on PC (2023, p. 11))and have the same marginal
productivity as other teaching hours.
It was also adjusted for the fact thatteachers comprise about 60% of theschool workforce (ABS 2022b).
Longer run benefits were based onconverting extra teaching time intohigher test scores and then higher
wages later in life. Based on theliterature, it was estimated that
3 additional teaching hours raises
test scores by 0.12-0.18 standard
deviations (Lavy 2015, p. F399;
Wedel 2021), and that each standard
deviation increase raises futurewages by 9-18% (Chetty et al. 2011,
p. 1613; Currie and Thomas 2001,
p. 116; Rose 2006; Vu andYamada 2022; Watts 2020).
Multiplying these numbers and taking
the midpoint results in about 2%
higher wages.

Simulations and output variables

ReportvolumeScenario description

Shocked parameter

Size of shockSensitivity testingvalues0.8%

0.3 to 1.6%

Based on a study (Bambalaite,
Nicoletti and von Rueden 2020,
p. 23) that found that a 1 unit
reduction in an indicator measuring
the stringency of occupational entry
regulations improved labour
productivity among 11 European
countries by 1.6%. For thesimulation, a 0.5 unit reduction in
stringency was assumed, whichtranslates to a 0.8% increase inlabour productivity. Relevant
industries were selected based on
those that were more likely to haveoccupational licensing
requirements.

0.1% (construction; retailtrade; hospitality; school
education; public
administration; otherservices)

Scaled by 2% to 10%,instead of 5%
improvement in labour
productivity of
migrants

For illustrative purposes, it was
assumed that better matching of
the migration program could
increase the labour productivity of
migrants by 5%. Census data of
migrants (ABS 2016b, 2016a) wasused to calculate the share ofworkers in each industry in 2016
who were primary applicants ofpermanent skilled visas, and who
arrived in Australia between 2006

Rationale

education’ industry was assumed to be
fixed.
A moreproductive
labourmarket,appendix A

A moreproductive
labourmarket,appendix A

21[6] Increasing labour
productivity by reducing
unnecessary occupational
licensing restrictions and thus
lowering barriers to labour
mobility[7] Increasing the productivityof workers coming throughpermanent skilled migration
by better matching the
migration program to labour
market needs

Labour-augmenting technical change
parameters were increased for thefollowing industries as they are more
likely to employ workers subject tooccupational licensing requirements:• construction• transport and wholesale• professional, scientific and technicalservices• school education• health and social services

Labour-augmenting technical change
parameters were increased forindustries with a higher share of
migrant workers

0.2% (mining; othermanufacturing; transport
and wholesale; financial
services; professional,
scientific and technical5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

ReportvolumeScenario description

Shocked parameter

Size of shockservices; health and social
services)
0.3% (advanced
manufacturing; technical,
vocational and tertiary
education)
0.6% (technology andtelecommunications)

22

Sensitivity testingvaluesRationaleand 2016. Modelled shocks werebased on multiplying the migrantshares by the labour productivity
change.

Simulations and output variables

3.2

Aggregate output variables

A range of aggregate outputs were calculated from the model results to analyse the overall effects of shocks.
These outputs are at a whole-of-economy, industry and labour group (age, sex or education) level, and aresummarised in tables 3.2 and 3.3 below. Detailed tables containing these results are available on theinquiry’s webpage.
Table 3.2 – Whole-of-economy outputs
Variablea
Output andNominal GDP

expenditure

Real GDP
Real gross national income (GNI)
Real consumption
Real investment
Real government expenditure
Real exports
Real imports

Pricesb

GDP price deflator
Consumption price deflator
Investment price deflator
Government price deflator
Export price deflator
Import price deflator
Real consumer wage (relative to CPI)
Real producer wage (relative to GDP price deflator)
Real consumer capital rental rate

Factors ofCapital stock

production

Total hours worked
Labour productivity

Household

Equivalent variation ($ billion)

wellbeing

Gini coefficient of inequality in consumption (percentage point change)

Trade

Current account deficit (percentage of GDP)
Terms of tradea. Measured in percentage change terms unless otherwise stated. b. Relative to the model’s numeraire, which was thehousehold consumption price index (chapter 1).

23

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Table 3.3 – Output variables at industry and labour group levelsa,bVariables at an industry level

Variables at a labour group level

Nominal output

Equivalent variation ($ million)

Real output

Hours worked

Output price deflatorb

Leisure hours

Labour hours used

Real labour incomeb

Capital used

Real capital incomeb

Real consumption of domestic commodities

Real savingsb

Real investment of domestic commodities

Real income taxesb

Real government expenditure on domestic commodities

Real consumptionb

Real exports by commodity

Average real consumer wage rateb

Real imports by commodity

Average wage gap (one labour group indexed to 100)

Domestic commodity price deflatorb

Population (million)c

Export commodity price deflatorb
Import commodity price deflatorb
a. Measured in percentage change terms unless otherwise stated. b. Relative to the model’s numeraire, which was thehousehold consumption price index (chapter 1). c. Population composition changes only apply in simulation 3.

24

Sensitivity testing4.

Sensitivity testingSensitivity testing was conducted to examine the extent to which some aggregate results would change withadjustments to uncertain assumptions. Sensitivity testing was undertaken to examine the effects of:• high and low values of shock sizes (outlined in table 3.1)
• high and low values of select elasticities (outlined in table 2.1), specifically the:– CES elasticity of substitution between composite consumption commodities (identified as ‘household
consumption elasticity’ in the charts illustrated below)– CES elasticity of substitution between composite labour and capital (industry factor elasticity)– CES elasticity of substitution between different types of labour (industry education labour elasticity, andindustry age-sex labour elasticity)• using an alternative method to determine total time endowments (and hence the initial split of time into
labour and leisure) for each individual group in order to achieve income elasticities of labour supply thatwere closer to plausible values stated in the literature (as described in chapter 2)• separately assuming that there are some constraints on factors of production, specifically that:– the capital stock is fixed– labour supply by each individual group is fixed– an initial portion of people are unemployed due to a wage floor; that is, wages are sticky downwards.12
The effects of these sensitivity tests on some key output variables (changes in real GDP, hours worked, realconsumer wages, and EV) are illustrated for select model simulations in figure 4.1. The vertical grey line on
the charts indicate the value of the variable under the original shock size and model assumptions. The points
on the charts indicate the values under different sensitivity tests, with the horizontal lines highlighting thedifference between these values and the values for the original shock. Sensitivity tests with the longest
horizontal lines had the largest effect on results.
The sensitivity testing results illustrate that assumptions around some constraints on factors of production
tended to have the largest effects on aggregate output variables.
When the capital stock was fixed, economic growth was significantly lower because of a lack of capitalneeded to support production and relatively high capital rental prices. For example, in simulation 1b it was
assumed that all production inputs (labour, capital and intermediate inputs) could be used more efficiently
across all industries excluding ‘ownership of dwellings’. The assumption of a fixed capital stock led to a real
GDP increase of only 1.8% instead of 3.3%. This could be thought of as representing the short-run effects ofthe shock; that is, the economic impact before the capital stock has had a chance to grow to its steady statelevel.
Assuming unemployment and a wage floor in the economy implies that wages were initially higher andproduction was lower than would be the case if labour markets cleared. This meant that households

12 Sensitivity tests in some simulations were not analysed, where it was likely that the model had not solved optimally.

25

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

inefficiently spent more time on leisure and consumed less than they would like at the given wages. The
simulated shocks tended to increase the market-clearing wage level because they induced growth in theeconomy. This brought wages closer to (or led them to exceed) the wage floor and led to a reduction in
unemployment (to zero for some labour types under some simulations). This also led to a relatively larger
increase in production than was seen under original model assumptions. While these results are seen in thisstylised model, it is noted that, in reality, unemployment is unlikely to fall to such an extent due to otherfactors that can affect it, such as structural and frictional factors.
Varying the shock sizes also had relatively large effects on the magnitude of changes in key output variables,
although the direction of effects tended to be the same as under the original shock size. For example, in
simulation 1b, the simulated change in real GDP was about 3.3% under the original assumed shock size of a
1% improvement in input-neutral technical efficiency. The real GDP increase ranged from 1.6 to 4.9% under
the respective assumptions of a 0.5% and 1.5% improvement in input-neutral technical efficiency.
The sensitivity tests for the alternative method of allocating labour and leisure, and for the assumption of
fixed labour supplies, tended to have smaller effects on output variables. This is because changes in hours
worked in the simulated shocks were relatively small in general under original model assumptions due tovarious competing effects. On the household side, the effect of higher wages had income and substitution
effects that worked in opposite directions (that is, people may want to substitute towards more work andconsumption instead of leisure because of the higher wages, but they can also earn the same income byworking less and enjoying more leisure instead). On the producer side, most of the industry-specific labour
productivity shocks meant that industries required less labour to produce the same amount of output, but
subsequent demand effects then increased the amount of labour required.
Changes to assumptions around elasticities also tended to have smaller effects on aggregate outputs,
relative to the other sensitivity tests conducted.

26

Sensitivity testing

Figure 4.1 – Select sensitivity testing resultsa
a. Simulation 1b — potential productivity benefits of diffusion
Shock size
Household consumption elasticity
Industry factor elasticity
Industry education labour elasticity
Industry age-sex labour elasticity
Alt method for time endowment
Fixed capital stock
Unemployment and sticky wages
2.5
5.0
7.5
Real GDP (% change)

20

30
40
50
Equivalent variation ($b)

2
46Hours worked (% change)

2
3
4
5
6
Real consumer wage (% change)

Shock size
Household consumption elasticity
Industry factor elasticity
Industry education labour elasticity
Industry age-sex labour elasticity
Alt method for time endowment
Fixed capital stock
Unemployment and sticky wages
0b. Simulation 6 — reducing unnecessary occupational licensing requirements
Shock size
Household consumption elasticity
Industry factor elasticity
Industry education labour elasticity
Industry age-sex labour elasticity
Alt method for time endowment
Fixed capital stock
Fixed labour supply
Unemployment and sticky wages
0.5
1.0
1.5
Real GDP (% change)24
6
Equivalent variation ($b)

0.0
0.5
1.0
1.5
Hours worked (% change)

0.0
0.2
0.4
Real consumer wage (% change)

Shock size
Household consumption elasticity
Industry factor elasticity
Industry education labour elasticity
Industry age-sex labour elasticity
Alt method for time endowment
Fixed capital stock
Fixed labour supply
Unemployment and sticky wages

a. The vertical grey line indicates the value of the variable under the original shock size and model assumptions. The
points indicate the values under different sensitivity tests, with the horizontal lines highlighting the difference between
these values and the values for the original shock.
Source: Commission estimates.

27

Model equations

5.

Model equations

Simple representations of the key equations underlying the model are shown in table 5.1. These complement
the high level diagrams showing the model structure in chapter 1. These equations are not in the same form
as they have been included in the GAMS code, which were written as mixed complementarity problems withpaired equations and variables.
Subscripts refer to various dimensions in the model:
•
•
•
•
•

c — commodities or industriese — education levell — individual groups of different age group, sex and education level combinationss — source of commodity (domestic ‘DOM’ or imported ‘IMP’)u — user of domestic and imported commodities (industries, household sector ‘HH’, government sector‘GOV’, investment sector ‘INV’).

Text colour refers to types of variables or parameters:•••

black — endogenous variables
blue — exogenous variables
green — parameters (select parameters shown only).

When markets clear, demand quantities (denoted by QDEM) equal supply quantities (QSUP), and demand
prices (purchaser prices, PDEM) equal supply prices (basic prices, PSUP) which are also equal to marginal
costs. In some parts of the model, where there are taxes or price floors, demand and supply quantities andprices may not equal (noted in the table below).
Table 5.1 – Simple representations of model equations for key variables
Equation
Individual groups and labour supply in household sector

1.
2.

1.

Desired quantity of composite consumption bundle per individual group, via utility maximisation
𝐷𝑒𝑠𝑖𝑟𝑒𝑑𝐶𝑜𝑚𝑝𝐶𝑜𝑛𝑠𝑄𝑙𝐷𝐸𝑀 = 𝐶𝐸𝑆(𝐷𝑒𝑠𝑖𝑟𝑒𝑑𝐼𝑛𝑐𝑙 , 𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑛𝑠𝑃𝑙𝐷𝐸𝑀 , 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 )3.

2.

Desired leisure per individual group, via utility maximisation
𝐷𝑒𝑠𝑖𝑟𝑒𝑑𝐿𝑒𝑖𝑠𝑄𝑙𝐷𝐸𝑀 = 𝐶𝐸𝑆(𝐷𝑒𝑠𝑖𝑟𝑒𝑑𝐼𝑛𝑐𝑙 , 𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑛𝑠𝑃𝑙𝐷𝐸𝑀 , 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 )4.

3.

Labour available per individual group, via utility maximisation
𝐿𝑎𝑏𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒𝑙 = 𝑇𝑖𝑚𝑒𝐸𝑛𝑑𝑜𝑤𝑙 − 𝐷𝑒𝑠𝑖𝑟𝑒𝑑𝐿𝑒𝑖𝑠𝑄𝑙𝐷𝐸𝑀

5.

4.

Actual quantity of composite consumption bundle per individual group
𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑛𝑠𝑄𝑙𝐷𝐸𝑀 = 𝐶𝐸𝑆(𝐼𝑛𝑐𝑙 , 𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑛𝑠𝑃𝑙𝐷𝐸𝑀 , 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 )6.

5.

Actual time not in employment (leisure and unemployed hours) per individual group
𝐺𝑟𝑜𝑢𝑝𝑁𝑜𝑛𝐸𝑚𝑝𝑙 = 𝐶𝐸𝑆(𝐼𝑛𝑐𝑙 , 𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑛𝑠𝑃𝑙𝐷𝐸𝑀 , 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 )7.

6.

Hours worked per individual group
𝐿𝑎𝑏𝑄𝑙𝑆𝑈𝑃 = 𝑇𝑖𝑚𝑒𝐸𝑛𝑑𝑜𝑤𝑙 − 𝐺𝑟𝑜𝑢𝑝𝑁𝑜𝑛𝐸𝑚𝑝𝑙
29

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Equation
8.

7.

Unemployed hours per individual group
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑𝐻𝑜𝑢𝑟𝑠𝑙 = 𝐿𝑎𝑏𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒𝑙 − 𝐿𝑎𝑏𝑄𝑙𝑆𝑈𝑃

9.

8.

Minimum hourly wage by individual group
𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 ≥ 𝑊𝑎𝑔𝑒𝐹𝑙𝑜𝑜𝑟𝑙

10. 9.

Income by individual group
𝐷𝑒𝑠𝑖𝑟𝑒𝑑𝐼𝑛𝑐𝑙 = 𝐿𝑎𝑏𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒𝑙 ∗ 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 + 𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐼𝑛𝑐𝑙 − 𝐺𝑟𝑜𝑢𝑝𝐼𝑛𝑐𝑇𝑎𝑥𝑙 − 𝐺𝑟𝑜𝑢𝑝𝑆𝑎𝑣𝑖𝑛𝑔𝑙
𝐼𝑛𝑐𝑙 = 𝐿𝑎𝑏𝑄𝑙𝑆𝑈𝑃 ∗ 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 + 𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐼𝑛𝑐𝑙 − 𝐺𝑟𝑜𝑢𝑝𝐼𝑛𝑐𝑇𝑎𝑥𝑙 − 𝐺𝑟𝑜𝑢𝑝𝑆𝑎𝑣𝑖𝑛𝑔𝑙
Demands for domestic and imported commodities, and composites of domestic and imported
commodities, across each sector

11. 10.

Demand for domestic and imported commodities per user and commodity, to produce composite commodities ofdomestic and imported commodities, via expenditure minimisation
𝑆𝑈𝑃
𝐶𝐸𝑆(𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝑢,𝑐, 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝑠,𝑐 ) 𝑤ℎ𝑒𝑟𝑒 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑖𝑠 𝑠𝑢𝑏𝑠𝑡𝑖𝑡𝑢𝑡𝑎𝑏𝑙𝑒
𝐷𝐸𝑀
𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑄𝑢,𝑠,𝑐={
𝑆𝑈𝑃𝑤ℎ𝑒𝑟𝑒 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑖𝑠 𝑛𝑜𝑡 𝑠𝑢𝑏𝑠𝑡𝑖𝑡𝑢𝑡𝑎𝑏𝑙𝑒
𝐿𝑒𝑜𝑛𝑡𝑖𝑒𝑓(𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝑢,𝑐)12. 11.

Industry demand for industry composites per industry (c’) and commodity (c), via expenditure minimisation
𝑂𝑈𝑇𝑃𝑈𝑇
𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝑐𝐷𝐸𝑀, 𝐼𝑛𝑑𝑂𝑢𝑡𝑝𝑢𝑡𝑄𝑐𝑆𝑈𝑃)′ ,𝑐 = 𝐿𝑒𝑜𝑛𝑡𝑖𝑒𝑓(𝜀𝑐 ′′Where 𝜀𝑐𝑂𝑈𝑇𝑃𝑈𝑇
is an input-neutral technical change parameter associated with the use of the industry composite′
factor of production and industry composite inputs made of domestic and imported commodities.
13. 12.

Individual group demand for household composites per individual group and commodity, via expenditure
minimisation
𝐷𝐸𝑀
𝐷𝐸𝑀
𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝑙,𝑐= 𝐶𝐸𝑆(𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑛𝑠𝑄𝑙𝑆𝑈𝑃 , 𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑃𝐻𝐻,𝑐
)
𝐷𝐸𝑀
𝐷𝐸𝑀
𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝐻𝐻,𝑐= ∑ 𝐺𝑟𝑜𝑢𝑝𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝑙,𝑐𝑙

14. 13.

Government sector demand for government composites per commodity, via expenditure minimisation
𝐷𝐸𝑀
𝐷𝐸𝑀
𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝐺𝑂𝑉,𝑐= 𝐶𝑜𝑏𝑏𝐷𝑜𝑢𝑔𝑙𝑎𝑠(𝐺𝑜𝑣𝑄, 𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑃𝐺𝑂𝑉,𝑐)15. 14.

Investment sector demand for investment composites per commodity, via expenditure minimisation
𝐷𝐸𝑀
𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝐼𝑁𝑉,𝑐= 𝐿𝑒𝑜𝑛𝑡𝑖𝑒𝑓(𝐼𝑛𝑣𝑄)

16. 15.

Demand price of composite commodities by user
𝐷𝐸𝑀
𝑆𝑈𝑃
𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑃𝑢,𝑐= 𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑃𝑢,𝑐(1 + 𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑢,𝑐 )17. 16.

Price of imported commodities
𝐼𝑚𝑝𝑜𝑟𝑡𝑊𝑜𝑟𝑙𝑑𝑃𝑐
𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝐼𝑀𝑃,𝑐 =𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒𝑅𝑎𝑡𝑒

18.

Demand for factors of production in production sector
17.

Demand for labour hours per industry, via expenditure minimisation
𝐷𝐸𝑀
𝐿𝐴𝐵
𝑆𝑈𝑃
𝐼𝑛𝑑𝐿𝑎𝑏𝑄𝑐,𝑙= 𝐶𝐸𝑆(𝜀𝑐,𝑙, 𝐼𝑛𝑑𝐸𝑑𝑢𝑐𝐿𝑎𝑏𝑄𝑐,𝑒, 𝐿𝑎𝑏𝑃𝑙𝐷𝐸𝑀 )𝐷𝐸𝑀
𝐻𝑜𝑢𝑟𝑠𝑙 = ∑ 𝐼𝑛𝑑𝐿𝑎𝑏𝑄𝑐,𝑙𝑐
𝐿𝐴𝐵
Where 𝜀𝑐,𝑙is a labour-augmenting technical change parameter associated with industry use of labour to

produce industry-specific ‘composite labour by education level’.
19. 18.

Demand for industry-specific ‘composite labour by education level’ per industry, via expenditure minimisation
𝐷𝐸𝑀
𝐷𝐸𝑀
𝐼𝑛𝑑𝐸𝑑𝑢𝑐𝐿𝑎𝑏𝑄𝑐,𝑒= 𝐶𝐸𝑆(𝐼𝑛𝑑𝐶𝑜𝑚𝑝𝐿𝑎𝑏𝑄𝑐𝑆𝑈𝑃 , 𝐼𝑛𝑑𝐸𝑑𝑢𝑐𝐿𝑎𝑏𝑃𝑐,𝑒)30

Model equations

Equation
20. 19.

Demand for industry composite labour per industry, via expenditure minimisation
𝐼𝑛𝑑𝐶𝑜𝑚𝑝𝐿𝑎𝑏𝑄𝑐𝐷𝐸𝑀 = 𝐶𝐸𝑆(𝛼𝑐𝐶𝑂𝑀𝑃𝐹𝐴𝐶𝑇𝑂𝑅 , 𝐼𝑛𝑑𝐶𝑜𝑚𝑝𝐹𝑎𝑐𝑡𝑜𝑟𝑄𝑐𝑆𝑈𝑃 , 𝐼𝑛𝑑𝐶𝑜𝑚𝑝𝐿𝑎𝑏𝑃𝑐𝐷𝐸𝑀 )Where 𝛼𝑐𝐶𝑂𝑀𝑃𝐹𝐴𝐶𝑇𝑂𝑅 is a multifactor productivity parameter associated with the use of labour and capital toproduce the industry composite factor of production (value added).

21. 20.

Demand for capital per industry, via expenditure minimisation
𝐼𝑛𝑑𝐶𝑎𝑝𝑄𝑐𝐷𝐸𝑀 = 𝐶𝐸𝑆(𝛼𝑐𝐶𝑂𝑀𝑃𝐹𝐴𝐶𝑇𝑂𝑅 , 𝐼𝑛𝑑𝐶𝑜𝑚𝑝𝐹𝑎𝑐𝑡𝑜𝑟𝑄𝑐𝑆𝑈𝑃 , 𝐶𝑎𝑝𝑃)
𝐶𝑎𝑝𝑄 = ∑ 𝐼𝑛𝑑𝐶𝑎𝑝𝑄𝑐𝐷𝐸𝑀
𝑐

22. 21.

Demand for industry composite factor (value added in value terms), via expenditure minimisation
𝐼𝑛𝑑𝐶𝑜𝑚𝑝𝐹𝑎𝑐𝑡𝑜𝑟𝑄𝑐𝐷𝐸𝑀 = 𝐿𝑒𝑜𝑛𝑡𝑖𝑒𝑓(𝜀𝑐𝑂𝑈𝑇𝑃𝑈𝑇 , 𝐼𝑛𝑑𝑂𝑢𝑡𝑝𝑢𝑡𝑄𝑐𝑆𝑈𝑃 )Where 𝜀𝑐𝑂𝑈𝑇𝑃𝑈𝑇 is an input-neutral technical change parameter associated with the use of the industry composite
factor of production and industry composite inputs made of domestic and imported commodities.
Industry output, and production of domestic and exported commodities in production sector

23. 22.

Supply price of industry output
𝐼𝑛𝑑𝑂𝑢𝑡𝑝𝑢𝑡𝑃𝑐𝑆𝑈𝑃 = (1 + 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑐 )𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑃𝑐𝐷𝐸𝑀′ ,𝑐𝐼𝑛𝑑𝐶𝑜𝑚𝑝𝐹𝑎𝑐𝑡𝑜𝑟𝑃𝑐𝐷𝐸𝑀
𝑂𝑈𝑇𝑃𝑈𝑇.𝐶𝑂𝑀𝑃𝐶𝑂𝑀𝑀∗ (𝛽𝑐𝑂𝑈𝑇𝑃𝑈𝑇.𝐶𝑂𝑀𝑃𝐹𝐴𝐶𝑇𝑂𝑅
+
∑
𝛽
)
𝑐
𝑂𝑈𝑇𝑃𝑈𝑇𝑂𝑈𝑇𝑃𝑈𝑇𝜀𝑐𝜀𝑐′𝑐

Where 𝛽𝑐 are Leontief parameters indicating units of input required per unit of output.
24. 23.

Supply of domestic and export commodities
𝐷𝑜𝑚𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑄𝑐𝑆𝑈𝑃 = 𝐶𝐸𝑇(𝑂𝑢𝑡𝑝𝑢𝑡𝑄𝑐𝑆𝑈𝑃 , 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝐷𝑂𝑀,𝑐 , 𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝑐𝑆𝑈𝑃 )𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑄𝑐𝑆𝑈𝑃 = 𝐶𝐸𝑇(𝑂𝑢𝑡𝑝𝑢𝑡𝑄𝑐𝑆𝑈𝑃 , 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝐷𝑂𝑀,𝑐 , 𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝑐𝑆𝑈𝑃 )25. 24.

Demand for exported commodities
𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑄𝑐𝐷𝐸𝑀 = [(𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝑐𝐷𝐸𝑀 ∗ 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒𝑅𝑎𝑡𝑒)
𝛼𝑐𝐸𝑋𝑃

𝜎𝑐𝐸𝑋𝑃

]

Where 𝜎𝑐𝐸𝑋𝑃 is the price elasticity of demand and 𝛼𝑐𝐸𝑋𝑃 is a scaling parameter.
26. 25.

Demand price of exported commodities
𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝑐𝐷𝐸𝑀 = 𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝑐𝑆𝑈𝑃 (1 + 𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑐 )27.

Investment, capital and saving

28. 26.

Total investment and capital
𝐼𝑛𝑣𝑄 = 𝛼𝐼𝑁𝑉𝑄 𝐶𝑎𝑝𝑄
𝐶𝑎𝑝𝑃 = 𝛼𝐶𝐴𝑃𝑃 𝐼𝑛𝑣𝑃
Where 𝛼𝐼𝑁𝑉𝑄 is the fixed ratio of investment to capital quantities, and 𝛼𝐶𝐴𝑃𝑃 is the fixed ratio of capital toinvestment prices.

29. 27.

Domestic and foreign investment and capital
𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐𝐼𝑛𝑣𝑄 = 𝐼𝑛𝑣𝑄 − 𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝐼𝑛𝑣𝑄
𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐𝐶𝑎𝑝𝑄 = 𝐶𝑎𝑝𝑄 − 𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝐶𝑎𝑝𝑄

31

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

Equation
30. 28.

Saving per individual group
𝐻𝐻𝑆𝑎𝑣𝑖𝑛𝑔𝑆𝑐𝑎𝑙𝑒𝐹𝑎𝑐𝑡𝑜𝑟 =(𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐𝐼𝑛𝑣𝑄 ∗ 𝐼𝑛𝑣𝑃)∑𝑙 (𝑂𝑟𝑖𝑔𝐺𝑟𝑜𝑢𝑝𝑆𝑎𝑣𝑖𝑛𝑔𝑅𝑎𝑡𝑒𝑙 ∗ (𝐿𝑎𝑏𝑄𝑙𝑆𝑈𝑃 ∗ 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 + 𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐼𝑛𝑐𝑙 ))𝐺𝑟𝑜𝑢𝑝𝑆𝑎𝑣𝑖𝑛𝑔𝑙 = 𝐻𝐻𝑆𝑎𝑣𝑖𝑛𝑔𝑆𝑐𝑎𝑙𝑒𝐹𝑎𝑐𝑡𝑜𝑟 ∗ 𝑂𝑟𝑖𝑔𝐺𝑟𝑜𝑢𝑝𝑆𝑎𝑣𝑖𝑛𝑔𝑅𝑎𝑡𝑒𝑙 ∗ (𝐿𝑎𝑏𝑄𝑙𝑆𝑈𝑃 ∗ 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 + 𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐼𝑛𝑐𝑙 )31. 29.

Capital per individual group
𝐻𝐻𝐶𝑎𝑝𝐼𝑛𝑣𝑆𝑐𝑎𝑙𝑒𝐹𝑎𝑐𝑡𝑜𝑟 =(𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐𝐶𝑎𝑝𝑄 ∗ 𝐶𝑎𝑝𝑃)∑𝑙(𝑂𝑟𝑖𝑔𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝐼𝑛𝑣𝑅𝑎𝑡𝑖𝑜𝑙 ∗ 𝐺𝑟𝑜𝑢𝑝𝑆𝑎𝑣𝑖𝑛𝑔𝑙 )𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐼𝑛𝑐𝑙 = 𝐻𝐻𝐶𝑎𝑝𝐼𝑛𝑣𝑆𝑐𝑎𝑙𝑒𝐹𝑎𝑐𝑡𝑜𝑟 ∗ 𝑂𝑟𝑖𝑔𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝐼𝑛𝑣𝑅𝑎𝑡𝑖𝑜𝑙 ∗ 𝐺𝑟𝑜𝑢𝑝𝑆𝑎𝑣𝑖𝑛𝑔𝑙
Government activity
30.

Total government expenditure
𝐺𝑜𝑣𝑄 ∗ 𝐺𝑜𝑣𝑃 = 𝛼𝐺𝑂𝑉 𝑁𝑜𝑚𝑖𝑛𝑎𝑙𝐺𝐷𝑃
Where 𝛼𝐺𝑂𝑉 is the fixed government share of nominal GDP.

32. 31.

Government budget balance
𝐺𝑜𝑣𝑄 ∗ 𝐺𝑜𝑣𝑃 = 𝐻𝐻𝐼𝑛𝑐𝑇𝑎𝑥 + 𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝐶𝑎𝑝𝐼𝑛𝑐𝑇𝑎𝑥𝑅𝑎𝑡𝑒 ∗ 𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝐶𝑎𝑝𝑄 ∗ 𝐶𝑎𝑝𝑃
𝐼𝑛𝑑𝑂𝑢𝑡𝑝𝑢𝑡𝑄𝑐𝑆𝑈𝑃 ∗ 𝐼𝑛𝑑𝑂𝑢𝑡𝑝𝑢𝑡𝑃𝑐𝑆𝑈𝑃+ ∑ (𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑐)
1 + 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑐𝑐+ ∑ ∑ (𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑢,𝑐𝑐𝑢+ ∑ (𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑐𝑐

33. 32.

𝐷𝐸𝑀
𝐷𝐸𝑀
𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑄𝑢,𝑐∗ 𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑃𝑢,𝑐)
1 + 𝐶𝑜𝑚𝑝𝐶𝑜𝑚𝑚𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑢,𝑐𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑄𝑐𝐷𝐸𝑀 ∗ 𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑃𝑐𝐷𝐸𝑀)
1 + 𝐸𝑥𝑝𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑐

Income tax per individual group
𝐻𝐻𝑇𝑎𝑥𝑆𝑐𝑎𝑙𝑒𝐹𝑎𝑐𝑡𝑜𝑟 =𝐻𝐻𝐼𝑛𝑐𝑇𝑎𝑥∑𝑙 (𝑂𝑟𝑖𝑔𝐺𝑟𝑜𝑢𝑝𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑙 ∗ (𝐿𝑎𝑏𝑄𝑙𝑆𝑈𝑃 ∗ 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 + 𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐼𝑛𝑐𝑙 ))𝐺𝑟𝑜𝑢𝑝𝐼𝑛𝑐𝑇𝑎𝑥𝑙 = 𝐻𝐻𝑇𝑎𝑥𝑆𝑐𝑎𝑙𝑒𝐹𝑎𝑐𝑡𝑜𝑟 ∗ 𝑂𝑟𝑖𝑔𝐺𝑟𝑜𝑢𝑝𝑇𝑎𝑥𝑅𝑎𝑡𝑒𝑙 ∗ (𝐿𝑎𝑏𝑄𝑙𝑆𝑈𝑃 ∗ 𝐿𝑎𝑏𝑃𝑙𝑆𝑈𝑃 + 𝐺𝑟𝑜𝑢𝑝𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐼𝑛𝑐𝑙 )32

Review of ‘whole-of-economy modelling’

Attachment A — Review of‘whole-of-economy modelling’
LY Cao, Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), Canberra.
I found the modelling appendix is well written and structured. It presents the CGE model developed by the
Productivity Commission. The model is purposely built inhouse to suit the needs of the Commission’s inquiry.
The model is considered as a standard, static, national CGE model with connection to the rest of world
through trade, investment and foreign ownership of capital. One feature I would like to highlight is that themodel represents Australian households in detail. It includes households by age group, gender andeducation level. This enables a kind of microsimulation-type modelling to understand different effects ofreforms on different household groups, for example, how economic benefits of a productivity reform are
distributed across household groups (is the reform leading to improvement of equality or the opposite?). The
model also includes endogenous labour supply through labour and leisure choices, which allows
understanding of insights on labour supply responses across household groups under a set of stylised
productivity reforms simulated in this inquiry.
I found the model is well documented in this appendix. The closure assumptions, nesting structures of each block,databases, parameterisation and calibration are all discussed in detail. Given the representation of multiple
household groups in the model, additional sources (such as SIH and HES) of data to input-output tables are used
to calibrate the household block. I found the household block is relatively complex but a very useful feature in thismodel, compared with some of other standard CGE models, since it introduces endogenous labour supply andpotential unemployment through wage floor constraint for each household group.
The model is used to run a number of scenarios to gain insights of reforms. Each scenario represents a setof stylised productivity shocks for relevant sectors and/or household groups from hypothetical reforms.
Overall, I found the model implementation of the channels of shocks is sensible, and the model results arelargely as expected for each scenario, noting the closure assumptions and model parameters used. All
results are well interpreted in the appendix.
My specific comments are listed below:
1. I would suggest also to report the model results on gross national income, since it captures foreign
income transfers
2. For the aggregation of sectors used, i.e. 17 sectors, some justifications for the choice would be useful
3. For the primary factors in the model, note that land is not a separate factor. This can be considered as alimitation of the model, since land is an important input to Agriculture.
4. In relation with the model closure, suggest adding some reasons for keeping foreign investment fixed,
when simulated domestic productivity increases
5. It would be useful to make it clear that an endogenous lump sum transfer to households is used tobalance the government budget
6. Determining investment to keep capital stock constant implies the assumption of the capital stock being
in a steady state. This has implications on domestic investment and savings required. Whether assuming
a trend growth of capital stock would be more appropriate?
7. Model limitations may include: not dynamic and cannot simulate a time path of effects; land is not a
separate primary factor (also see comment 3); both capital and labour are assumed perfectly mobile
across sectors. If capital is immobile, for example, the gain would be smaller.
33

5-year Productivity Inquiry: Whole-of-economy modelling Inquiry report

8. It would be interesting to know what the implied labour supply elasticity is with the assumed parameter of
0.5 for the ratio of total hours worked to the total time available
9. For the trade elasticities, a reference source could also include the GTAP database
10. For the CET elasticity between export and domestic market, depending on commodities, the number
could be even higher. I tend to believe that a larger elasticity implies bigger effects.
11. That costs of implementing reforms are not included in the modelling can be added to the limitations of
the modelling
12. The design for scenario 3a) and 3b) could be confusing, particularly in terms of comparison of results,
whether 3b) is compared against the normal baseline or the 3a)
13. For scenario 5, the shocks are interpreted as in short-run, long-run and very long-run; while the modelclosure does not change accordingly – some explanations on the reasoning would be useful
14. For the table on Whole-of-economy outputs, it would be good to include a note that the prices are relative
to the fixed numeraire which is CPI
15. In terms of reporting the results across sectors, are there any better metrics to measure the relative impacts
between sectors, for example, change in GDP relative to change in the output of the shocked sector
16. Some interpretation of sector-specific impacts could be related to the capital intensity of the affected
sector – as the intensity would drive the requirement for capital, given capital is flexible in this modelling
17. The interpretations of the results are mostly on labour. I’d suggest including the effects on capital as wellin the interpretations.
18. In the first chart for the sim 2: what would be the reasons for the price drop for other manufacturing, andquantity drop for advanced manufacturing?
19. Interpretation for 3a) and 3b) could be made clearer (also see the comment 12 above).
20. The first chart in sim 5, based on the impacts on price and quantity, the implied price elasticity of demand
for school education is greater than -1. Any estimate of this elasticity in the literature? Also, note in thesecond chart for sim 5 in relation with long run shocks, the implied elasticity for school education is muchsmaller (or much bigger in absolute value).
21. For sim 6, are the employment falls for older age groups due to the income effect as a result of higher wage?
22. I found the sensitivity test results are useful, which provide a range of possible estimates, depending onparameter values and closure assumptions. The directions of changes with the changes in parameters andclosure assumptions are largely as expected with good interpretations provided in the appendix. But it seems
there are too many charts. An additional test could include alternative assumption on the foreign investment.
In summary, my specific comments above are mainly related to closure setting, for example, is it appropriate
to assume foreign capital stock and investment fixed in all of the productivity sims? In terms of interpretationof results – I was thinking some rules of thumb in understanding the impacts of productivity shocks. For
example, the relative impact on GDP would depend on labour shares and GDP shares of a shocked sector.
As capital is endogenous, the results would also depend on how much capital is increased. The other point
is whether we could draw any guidance to understand the impact on quantity given the impact on price, fromthe perspective of price elasticity of demand (if there are any estimates of these elasticities in the literature)(i.e. related to the comment 20).
A final point I would like to mention that the modelling presented in the appendix has also taken inputs fromthe public modelling workshops in which I also participated – these inputs include, for example, thesuggested parameter values to use in the modelling and model closure assumptions.

34Abbreviations

Abbreviations
ABS

Australian Bureau of Statistics

CES

Constant elasticity of substitution

CET

Constant elasticity of transformation

CGE

Computable general equilibrium

CPI

Consumer price index

EV

Equivalent variation

GAMS

General algebraic modelling system

GDP

Gross domestic product

GNI

Gross national income

GTAP

Global Trade Analysis Project

GVA

Gross value added

HES

Household Expenditure Survey

ICT

Information and communication technologies

IO

Input-output

SAM

Social accounting matrix

SIH

Survey of Income and Housing

VET

Vocational education and training

35

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