Memo to the Productivity Commission: fixing inequality is the key to productivity

Oct 3, 2022
Miniature people standing on a pile of coins. A concept of income disparity.
Image: iStock

Every five years the Productivity Commission is charged with examining everything that can be done to lift Australia’s productivity.

Its first interim report in the current inquiry, issued well ahead of its final report due in February, proposes action on innovation, digital technologies and data and cyber-security, a productivity-friendly business environment, and a skilled and educated workforce.

But it doesn’t propose anything to address inequality.

What it doesn’t consider is the possibility that reducing inequality might be necessary to boost productivity – by improving the quality of our workforce and our institutions.

Productivity increases when you produce the same things with fewer inputs, or produce more (either quantity or quality) with the same inputs.

At the scale of the Australian economy, productivity is increased if we better use our human resources.

And disadvantage reduces people’s capability to be properly used in the workforce.

Workers without foundational numeracy and literacy skills are less useful, particularly for work involving digital technologies of the kind that is becoming more ubiquitous.

Inequality makes people less economically useful

Our highly segregated school system, which concentrates disadvantage, means many students from disadvantaged backgrounds don’t have the peers that would support them to aim for highly productive jobs.

Leaving a substantial share of workers without the ability to do more productive work acts as a drag on productivity growth.

In its interim report the Commission continues its tradition of advocating light-handed regulation of businesses in order to lower compliance costs.

Its motivation is to make it easier for new businesses to enter markets and improve competition. But it pays less attention to the reasons for regulations.

Better regulation, not less regulation

Regulations are needed to protect consumers, workers and the planet by making products, workplaces and the environment safer.

They matter more for people who are disadvantaged and find it hard to take action to protect their rights.

This means the solution is not necessarily less, but better regulations that better protect those least able to protect themselves.

Regulations that purport to treat people (or businesses) equally implicitly assume they have similar needs and capabilities. Disadvantage can mean they do not. As an example, it is often the poor who are most exposed to workplace and environmental hazards.

Good regulations take account of the way in which different groups are affected.

Productivity is not everything. What matters most is ensuring everybody has the opportunity to lead a good life – not only for its own sake, but also because where this opportunity is withheld, social stability is at risk. People who do not benefit from a system are less likely to respect the rules and norms that make it work.

Fighting disadvantage can pay off

And how well off we are is not only determined by how well we produce things but also by whether they are the things we value.

As an example, while better-performing justice, health and defence systems are better than worse-performing ones, reducing the need to use those systems by reducing the problems they deal with is even better.

Investments that reduce disadvantage are likely to boost productivity over the long term, a concept acknowledged by the International Monetary Fund and the OECD, and one the Commission ought to pay more attention to in its final report.


Jenny Gordon is Honorary Professor, Centre for Social Research and Methods, Australian National University

First published in THE CONVERSATION September 23, 2022

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