Australia did well enough during the first outbreak of COVID-19 in 2020, thanks to a strong economy at the time. The initial economic downturn was of mild proportions in comparison to other OECD countries. But now, with NSW & Queensland grappling with the ramifications of the Delta variant, the prospects of economic recovery are cut with uncertainty and risks.

OECD’s latest Economic Survey of Australia, released last week, projects that in 2021, Australia will see a GDP growth of 4.0%, down 2.5% from 2020 - and it will drop to 3.3% in 2022. The economy will witness a contraction in the 3rd quarter of 2021 and then revert to its growth pace. But the road to recovery this time will be much more gradual.

The report highlights that the pandemic has exacerbated existing issues faced by the workforce, including very poor unemployment benefits and licensing complexity that has held many back from seeking alternative work. On top of this is rising household debt, a tax mix that is still skewed towards income taxes and places a heavy burden on individual taxpayers, and the biggest problem: job losses that have only been unevenly recovered.

The most severe impacts on the workforce: 

Manpower scarcity and sector shrinkage as borders remain closed - Due to international border restrictions, sectors traditionally reliant on foreign workers such as agriculture have suffered severe labour shortages. Bilateral tourism and education exports have also been badly affected.

Jobs for the younger generation are not recovering - As with many other countries, the poor, the young, and women were disproportionately affected. Low wage earners were the most impacted by job losses at the start of the pandemic, and although employment has more or less bounced back for those aged 35 and above, far fewer younger workers are employed today than they were before 2020, a trend that the OECD warns will drive intergenerational inequality and social divides.

Unemployment benefits are inadequate - Australia has some of the lowest unemployment benefits replacement among OECD countries, below the estimates of the relative poverty line. Even though the working-age unemployment benefit was raised by AUD50 per fortnight, the benefit for a single person in the first month of unemployment in Australia, is just 29% of the average wage. One 2021 estimate actually suggests that 85% of recipients of unemployment benefits will be in poverty - worsening the problems faced by younger age groups.

Productivity and wages are stagnant - OECD figures indicate that even before the pandemic, labour productivity in Australia had slipped below OECD averages, and the average hourly wage had been on a downward trend since 2012. While this might be considered par for the course in a developed economy, it doesn’t bode well for the recovery.

The inefficiency of occupational licensing is shown up even more - The OECD has criticised Australia’s occupational licensing system more than once: not only do the licensing requirements raise costs for workers, employers, and customers alike, they also hamper job mobility, which in the current environment is not helping employment levels. 

The biggest contributors to employment aren’t doing well - The OECD identifies startups and small, young firms as core drivers of economic activity, job creation, and productivity  in Australia. But the number of startups and young firms has been on a decline for the last decade, and the pandemic hit them hard. They also face difficulty recovering now, because they tend to have difficulty accessing bank credit.

Overhaul institutional frameworks and create a safety net, OECD says

According to the report, the OECD appears to be of the view that abandoning the COVID-Zero strategy will have a net positive effect on actual economic revival, no matter how slow. But now strong productivity growth is required which must be ensured by a pivotal change in macroeconomic policy and structural reforms. If the impact on the workforce is to be buffered, there’s a need for institutional reform to address the weaknesses in the economy. The report calls for several key recommendations:

1. Ensure that all eligible adults are vaccinated and international borders reopened as soon as possible
2. Overhaul the occupational licensing system to allow automatic recognition of licenses across territories
3. Reduce regulatory, administrative and financial barriers for small businesses and high potential firms, including making it easier for them to obtain financing
4. Create a more equitable safety net by raising the unemployment benefit rate and indexing it with wage inflation
5. Goods and Services Tax and recurrent land taxes should be given priority over income taxes and other inefficient taxes