- Economy-wide measures to boost competition and economic dynamism
National Competition Policy in need of renewal
4.1The Committee heard that national competition policy—covering federal, state and territory jurisdictions—was no longer fit-for-purpose in several areas and needs to be revitalised.
The legacy of the Hilmer Review
4.2The Hilmer Review of 1993 provided the foundation of Australia’s modern national competition policy framework.
4.3Its recommendations paved the way for the establishment of the Australian Competition and Consumer Commission (ACCC) and the National Competition Council (NCC).
4.4Reforms to the Trade Practices Act ended anomalies experienced by commercial entities arising from the division of constitutional authority between federal and state governments and provided a new regulatory regime to block natural monopolies from abusing their market power.
4.5The resulting intergovernmental Competition Principles Agreement, agreed at the 1995 meeting of the Council of Australian Governments, included two key elements:
- That regulation and legislation be reviewed for their impact on competition—in other words, does the public benefit exceed the cost?
- That state-owned entities, before engaging in commercial activity, be subject to ‘competitive neutrality’ requirements to address any market distortions that could potentially affect private businesses.
- The Productivity Commission described competitive neutrality as follows:
…the proposition that state owned enterprises and private businesses should compete on a level playing field. Competitive neutrality policy is also concerned with government businesses that may compete with each other. It has long been recognised that favourable conditions for government enterprises, in relation to their private sector counterparts, can distort all kinds of economic decisions, particularly around innovation, investment and hiring, ultimately leading to suboptimal outcomes for consumers and workers. Artificial cost advantages can also lead to resources like capital and labour flowing to government businesses simply because of their government ownership rather than them being the most efficient users of those resources. Where resource allocation distortions occur, the nation's productivity suffers.
4.7A 2005 Productivity Commission review found that the post-Hilmer National Competition Policy improvements delivered an increase to GDP of at least 2.5 per cent. This did not include the ‘dynamic’ benefits of more competitive markets resulting from the reforms, ‘such as the stronger incentives for service providers to continue to improve their productivity and quality and to innovate in order to achieve competitive advantage’.
Harper Review
4.8A subsequent competition policy review, between 2013–2015, was led by Professor Ian Harper. The review made sweeping recommendations for the reform of competition law and changes to competition policy and competition policy institutions. Recommendations included strengthening the misuse of market power prohibition, a simplification of the prohibitions against cartel conduct, a repeal of price signalling provisions, and the creation of an independent access and pricing regulator.
4.9Additionally, the Harper Review provided a series of recommendations prioritising competition reform in the delivery of human services and infrastructure, and for reviews across jurisdictions of anti-competitive regulations, competitive neutrality, and government procurement guidelines. It also proposed a review of Australia’s intellectual property regime.
4.10Several changes to Australian competition law ensued. These included provisions regarding misuse of market power, mergers, cartels and joint ventures, ‘concerted practices’, infrastructure access, and third party forcing and resale price maintenance.
National competition policy needs a refresh
4.11Despite Hilmer’s positive impact, the consensus of witnesses was that the momentum for competition policy reform in Australia had long since stalled, especially because many key recommendations of the Harper Review had not been implemented—notwithstanding the legislative changes referenced above.
4.12The NCC told the Committee that the intended successor to the post-Hilmer 1995 Competition Principles Agreement, the post-Harper 2016 Intergovernmental Agreement on Competition and Productivity, had not been agreed to by all the states. This meant there were no national competition principles currently in operation and that adherence to competitive neutrality and reviews of potentially anti-competitive provisions in legislation had ‘waned somewhat’.
4.13Evidence of the competition policy drift, the NCC continued, included the fact that the NCC had not been directed since to review the competitive neutrality policies of the Commonwealth, states and territories, despite the need for ‘focused attention’ in this area.
4.14The NCC added that it firmly supported the 2015 Harper Review’s recommendations that a public interest approach be reinstated to assess the impact on competition of legislation and regulation. This was because:
…there’s no doubt that anti-competitive elements that shouldn’t be there have crept into legislation in most or all jurisdictions. In particular, there hasn’t been a cost-benefit or public interest test (different from a RIS) about whether there’s a net benefit to having those regulations.
4.15Similarly, the Productivity Commission told the Committee that the time had come for reforms to national competitive neutrality policy, particularly as Australia had recently signed up to the OECD’s recommendation in this area. The limitations of the current regime, the Commission continued, were extensive:
…the policy lacks a credible enforcement regime; there's a lack of guidance on what a public interest test should embody and what it should look like; there are poor processes to ensure compliance with the policy by startup government businesses; there's little guidance or principles on what constitutes 'government' in 'significant government business activities'; there's little guidance on which policy or complaints process should apply for business activities with multiple government owners; there's no mention of the full range of possible material competitive advantages, other than those relating to tax, debt and regulatory neutrality and any commercial rate of return, and there's poor guidance on methodologies for estimating the value of some advantages; there's an absence of guidance on whether any identified cost advantages should be addressed by the imposition of an adjustment payment or by directly addressing the source of the advantage; and, finally, there's a need to reformulate the commerciality test of competitive neutrality policy.
4.16In addition, the Productivity Commission advised, implementation of the competitive neutrality principles was poor. Investigations (conducted by the Australian Government Competitive Neutrality Complaints Office within the Productivity Commission) depended on ‘goodwill more than anything’. No time frames for responses from the relevant parties meant that the process extended excessively or was not completed. On the enforcement side, there was little incentive for jurisdictions to act on investigation recommendations because national competition policy payments from the Commonwealth to the states and territories (based on satisfactory progress against reform objectives) lapsed almost twenty years ago. To the Commission’s knowledge, there had only been one competitive neutrality complaint resulting in a competition case.
A national regulator for co-operatives
4.17The inquiry also heard from the Business Council of Co-operatives and Mutuals (BCCM) about its role in helping build a strong, resilient and inclusive economy. The purpose of co-ops and mutuals is to deliver benefits back to members, rather than profit maximisation to investors.
4.18In 2022 some 1,832 active co-operative and mutual enterprises operated in Australia. These firms had a combined 31.7 million memberships, generated $203 billion in revenue, managed over $1.28 trillion in assets, and directly employed at least 76,000 people.
4.19The BCCM raised concern over demutualisation in recent decades, which had significantly reduced diversity. It submitted that the stated rationale is the need for additional capital to develop the business, noting that ‘However, the actual experience of demutualisation is that most businesses soon ceased to trade as independent entities as they were merged into larger consolidated groups.’ Further, the BCCM claimed that ‘legislation governing co-operatives and mutual enterprises (CMEs) actually incentivises demutualisation by permitting legacy assets to be distributed.’
4.20In some countries, legislation prohibits the distribution of such capital. Instead, it must be used for the purpose intended by the original founders or otherwise transferred to a different CME to fulfil this objective. In those jurisdictions where legacy assets are not available for distribution, demutualisation is less common and as a consequence, large CMEs maintain their member ownership, reflecting significant mass in a range of markets.
4.21The BCCM stated that in Australia, there are no legislative restrictions on the distribution of assets and as a result, waves of demutualisation have occurred, starting in the late 1980s and 1990s.
4.22The BCCM called for voluntary legislation, such as is being implemented in the United Kingdom, to ensure legacy assets are preserved for the purpose they were intended and not the subject of asset raids.
A job for the Competition Review
4.23Witnesses agreed that the current Competition Review, announced by the Treasurer, the Hon Dr Jim Chalmers MP, in August 2023, was the best means for developing a new round of national competition policy reforms.
4.24The Competition Review recently released a consultation paper and is inviting public submissions. The consultation paper covers emerging concerns related to Australia’s merger rules and processes, and presents a variety of options for change. This is intended to be the first in a number of stages.
4.25The NCC said it was ‘very confident’ the Review would consider the competition issues outlined above and that it would need to ‘pick those reforms that are going to deliver the best outcome for the investment made in them’. The NCC also emphasised the importance of a shared agreement and commitment between jurisdictions about the priority areas for reform, aligning incentives across states and territories, and then ‘independent monitoring of reform delivery’.
4.26Similarly, on the issue of competitive neutrality, the Productivity Commission identified the Review as the appropriate vehicle for reconsidering policy.
4.27Treasury, in response, told the Committee it looked forward to working with states and territories on competition reforms, that it had a ‘specific mandate’ to do so, and that such work would be progressed through the Council on Federal Financial Relations. Treasury added that competition policy reform aligned with the priorities of like-minded countries, notably the United States, the United Kingdom and Canada.
4.28The Committee notes that boosting national competition policy could take a number of forms:
- A reinvigorated National Competition Council;
- A more explicit coupling of competition policy and enforcement in the ACCC’s regulatory arrangements; or
- A competition role in another body, such as the Productivity Commission.
4.29That the Treasurer’s Competition Policy Taskforce examine governance arrangements for the development and advancement of competition policy and institutions, including explicit consideration of whether this would best be achieved by the creation of a new institution responsible for developing competition policy or, instead, the allocation of this responsibility to an existing institution (with suitable resourcing).
4.30That the Treasurer’s Competition Policy Taskforce examine whether competitive neutrality principles require updating.
4.31That the Treasurer’s Competition Policy Taskforce examine the establishment of a single national regulator for co-operatives and mutuals.
- Now that co-operatives national law has been consistently adopted across all states and territories, a single regulator would ensure national consistency and access to full information about co-operatives and mutuals.
- Such a process should be managed under a principle of no disadvantage—adopting best practice from different jurisdictions and ensuring all types of co-operatives and mutuals are treated equally and fairly.
- Consideration of such a measure should include an assessment of its impact on the broader banking sector.
Merger laws
4.32The inquiry received substantial evidence that Australia’s pre-merger notification arrangements were not conducive to a competitive environment. Witnesses also saw the current merger test as falling well short of international best practice.
Australia’s merger regime
4.33Though most mergers are not anti-competitive and can be beneficial, an effective merger regulatory regime could prevent transactions that were likely to be anti-competitive. A strong merger regime was therefore essential to maintaining ‘competitive, dynamic and resilient markets’.
Inherent weaknesses
4.34Australia’s mergers review regulatory framework is a voluntary system. There is no legal requirement to notify the relevant regulator, the ACCC, of a proposed merger.
4.35Such an approach, the ACCC argued to the Committee, was no longer fit for purpose and was ‘out of step with international best practice’. It could result in late, incomplete, or non-notification to the ACCC of a potentially anti-competitive merger. In certain circumstances, the ACCC may be able to take action in the Federal Court to prevent or unwind a merger. However, the ACCC—rather than the merger parties—bore the burden of evidentiary proof. The ACCC summarised the future risk to competition of the current mergers review regime as follows:
The future is inherently uncertain and is particularly so where markets are dynamic and there are complex commercial environments, as is increasingly the case. This is particularly difficult in circumstances involving the acquisition of a potential or nascent competitor, where the potential for competitive harm can be profound but where there is also considerable uncertainty about the future of competition. Since a court must be convinced of the future state of the market, this uncertainty can be the driving factor behind difficulties proving a breach of section 50 rather than an absence of risk to competition. Where there are risks that a merger will result in significantly less competition, it is the public interest rather than the merger parties, that ends up bearing the risk in our current merger regime.
4.36The Committee heard from former ACCC chair Professor Rod Sims that Australia had ‘the weakest merger regime of any country we compare ourselves to’. Professor Sims summarised the differences thus:
All those other countries have a regime where you have to notify the regulator. You have to get some form of approval before you can proceed. The regulator gets to form a view and gets to call in a lot of information. Our law doesn't do any of that. It simply says, 'Don't have a merger or acquisition that is likely to substantially lessen competition.' Essentially that's it. There is an informal regime, where people knock on the ACCC's door and say, 'Look, if we go ahead, are you likely after the event to come after us, because we would like to know upfront?' There's no requirement on them to do that.
4.37The Committee also heard that shortcomings in the management of merger reviews could be having a material impact on the level of competition in some sectors of the economy. Professor Sims observed that under the current arrangements, the ACCC had not been able to prevent mergers in ‘energy, telecommunications, railways, and a whole range of sectors’ and that this had damaged the economy.
4.38In August 2023, for example, the ACCC blocked ANZ Bank’s $4.9 billion takeover of Suncorp’s banking arm, on the grounds that the acquisition would ‘further entrench an oligopoly market structure that is dominated by the four major banks.’ However, the decision was appealed, and in February 2024, the Australian Competition Tribunal overturned the ACCC’s ruling.
Tracking mergers
4.39Treasury’s Competition Taskforce has just developed Australia’s first whole of economy approach to tracking mergers and acquisitions. This includes the first mergers database for Australia using administrative data, which gives a more complete picture of mergers and acquisitions.
4.40Under the voluntary notification system, the ACCC has considered about 330 mergers each year on average over the past decade. Initial results from the mergers database tracking labour flows suggests there are many more mergers than this each year—somewhere between 1,000 and 1,500. For every merger that is notified to the ACCC, there are two to four more mergers and acquisitions that take place.
4.41The database shows that most target firms are medium-sized businesses, while acquisitions are disproportionately made by very large firms (which account for less than 1 per cent of the universe of firms). It also shows that merger activity by very large firms increased over the 2010s.
4.42The database also shows merger target firms are more likely to have a trademark or patent compared to an average firm. Merger target firms are more than twice as likely to have a patent (0.4 per cent relative to 0.15 per cent of firms overall) and almost twice as likely to have a trademark (4.5 per cent relative to 2.4 per cent of all firms). This highlights the purchase of intellectual property as a possible motivating factor behind mergers.
4.43Additionally, the database demonstrates that merger activity is more frequent in the manufacturing, retail, professional services, and health and social services sectors.
ACCC proposed reforms
Changes to the merger review process
4.44The ACCC’s inquiry submission has proposed changes to improve both the merger review process and the merger law.
4.45The current process places the onus on the ACCC to show why a potentially anti-competitive merger should not proceed.
4.46The ACCC has suggested instead a mandatory suspensory formal clearance regime—in essence requiring merger parties proposing a transaction above a prescribed notification threshold to demonstrate that the merger would not ‘significantly reduce competition’. This model would include transparent information requirements and review timeframes, a notification waiver option for proposals that meet the threshold but with a low risk of a substantial lessening of competition and provide the ACCC with greater discretion to consider cases below the threshold but that still raise competition concerns. The process reforms would also have a judicial review mechanism and a second stage public benefit test for a disallowed merger—enabling the merger to still proceed ‘where the competition effects are outweighed by real, verifiable, and substantial public benefits’.
4.47The ACCC summarised the benefits of its proposed clearance system as follows:
An appropriately designed formal clearance system would provide greater transparency, accountability and ensure the ACCC has sufficient time to consider the competition effects of proposed mergers, while providing more timing certainty for the merger parties. It could also transition from the existing taxpayer funded regime towards a user pays approach, and provide greater consistency in the assessment of domestic and foreign acquirers (which are subject to a mandatory and suspensory regime under the Foreign Acquisitions and Takeovers Act 1975 (Cth)). In addition, the notification waiver process explained above would allow for a quick and simple process for the many mergers that do not give rise to competition concerns.
Changes to the merger law
4.48The ACCC submission also advocates for changes to the relevant governing legislation for mergers, section 50 of the Competition and Consumer Act 2010 (the ‘Act’) to ‘better focus the merger assessment on the structural conditions for competition in markets most at risk of the exercise of market power, and on identifying the competition lost when the acquirer has substantial market power’.
4.49As it stands, the ACCC advised, section 50 is inadequate in addressing creeping acquisitions by a dominant firm of smaller or potential competitors. This is due to its focus on whether the incremental change from a single acquisition results in a substantial lessening of competition rather than on whether the acquisition increases or enhances a firm’s position of market power—which is a particular concern regarding digital platforms.
4.50The ACCC submission has proposed that section 50 be changed to expressly state that a substantial lessening of competition includes ‘entrenching, materially increasing or materially extending a position of substantial market power’, aligning it with a similar provision in the European Commission’s merger test.
4.51It also proposes several wording changes to the guiding factors in section 50(3) of the Act, which governs the issues to be taken into account when assessing ‘substantial lessening of competition’. This is to bring greater clarity and scope to the mergers review regime, particularly in considering the effects on competition of dominant firms potentially controlling data and technology.
Support for the ACCC proposals
4.52The Committee heard broad support for the ACCC’s proposed changes to the merger review regime.
4.53Another former ACCC chair, Professor Allan Fels, was in general agreement with the ACCC’s proposed changes to the merger review process and law, viewing it as an area of critical reform to tackle declining competition in Australia. The limitations of the current regime, Fels believed, had seen the ACCC lose ‘a lot of merger cases lately not due to their poor litigation skills’. This contrasted with the US, which still ‘reject some mergers’, and the European Union, where there’s ‘far more merger rejection’.
4.54Professor Fels agreed that a compulsory pre-merger notification should be legislated, aligning Australia with ‘North America, Europe and most of the rest of the world’. Pre-merger notification would also mean that when international mergers involving Australian entities were approved overseas, the effects on the Australian market structure can be assessed. Additionally, Fels supported the ACCC being empowered to make legally binding determinations on whether a proposed merger breaches the Act on the grounds of a reduction in competition. This should have an associated ‘merits based’ appeal process through the Australian Competition Tribunal that would ‘in essence review the principles that governed the ACCC decision and the adequacy of the evidence’.
4.55Professor Fels agreed that the wording of the Act should be ‘tweaked’ by adding some words to enable the ACCC to focus on ‘whether or not the merger creates, or adds to, a substantial degree of market power’.
4.56Separately, Professor Sims had proposed merger regime reforms in 2021 while chair of the ACCC. He also firmly supported the ACCC’s proposed reforms suggested in its submission, noting that the ACCC had consulted widely with him and others on the subject. Professor Sims told the Committee it was now time to bring the ACCC proposals to parliament as draft legislation.
4.57The e61 Institute deferred to the ACCC as best placed to advocate for changes to the merger review regime. The e61 Institute’s concern with the current system was that its voluntary nature could miss important mergers and acquisitions. In particular, the e61 Institute warned of the phenomenon of ‘midnight’ mergers, whereby large firms acquired smaller firms one by one without scrutiny. Each acquisition looks insignificant in isolation but taken cumulatively, the practice can dramatically affect concentration in a market. For these reasons, in the e61 Institute’s view, questions about thresholds and how ‘substantial lessening of competition’ was defined and measured in the future were key. The Committee notes that the proposed ACCC reforms seek to address these questions.
4.58Professors Flavio Menezes and John Quiggin held similar views to the ACCC. Professor Menezes told the Committee that the decline of competition highlighted the inadequacy of Australia’s ‘more passive approach to assessing mergers’. Like others, Professors Menezes and Quiggin supported a mandatory notification regime, and empowering the ACCC to ‘independently initiate market studies and investigations along with considering the adoption of a per se rule that prohibits dominant firms from acquiring businesses in markets already lacking sufficient competition’. An additional justification for a mandatory regime, Professor Menezes continued, was to give the ACCC sufficient time to analyse the effect of a proposed merger on a market—an important consideration given the complexity of the issues at hand.
4.59Professor Deborah Healey and Dr Rhonda Smith agreed that merger provisions required ‘urgent review and improvement, as they are difficult to enforce even in a non-digital environment but are particularly so in a digital environment’. They voiced similar concerns to others over the ‘substantial lessening of competition’ test and saw as vital some form of public benefit analysis in the process. They told the Committee that:
The problem with mergers is that the current 'substantial lessening of competition' test administered by the courts is not working well. We agree with the ACCC that a system of compulsory notification over predetermined thresholds, with an administrative decision by the ACCC, would be better than the current situation. These could be appealed to the Australian Competition Tribunal, which has [fewer] issues around dealing with economic evidence because it's not bound by the Evidence Act.
… the commission has refined its suggestions, and we agree with some of those. There is still now a proposal to allow the weighing of a merger's anticompetitive detriment and public benefit, which the first tranche of suggestions had taken away. We think that's really important, because we will now, going forward, often be looking at issues like sustainability and supply chain issues, which may substantially lessen competition in a merger but do have overriding public benefits. So we think some form of public benefit analysis is essential.
4.60Professor Healey and Dr Smith also highlighted that while the mergers test was necessarily a forward-looking process, it was complicated by the dynamic environment of a modern economy undergoing digital transformation. It meant that rather than base assessments on historical patterns, regulators may be better served in taking a risk assessment approach to the test. For this reason, the Australian Competition Tribunal would be preferable to the courts when it comes to the review aspect of a new mergers assessment regime—it was better-placed to take a strategic approach, grounded in economics, to understanding a planned merger’s effect on a market rather than the ‘very legalistic approach to competition law cases compared to other jurisdictions’ taken by the Australian courts. Dr Smith told the Committee that:
What we have normally done in the past is that we've recognised that things may change in the future but we've used the past as a guide to where we're heading. When you're looking at very dynamic environments it becomes much more difficult to predict what the situation is going to be, and we've developed this approach of saying what will happen with the merger and what will happen without the merger. It may well be that we're doing ourselves a disservice by approaching it that way and that really we should simply be asking: 'What is the likely effect of the merger? How is it going to change the environment?' But at the end of the day it becomes something of a risk analysis. We can make forecasts about what the future might look like, but we need to attach certain probabilities or risks to those forecasts. That may not be something that is easily managed in a court. It's much more easily managed where the rules of evidence are still thought about but not applied in the strict sense that the court applies them. That's the big difference between the court and the tribunal.
The Productivity Commission’s alternate view
4.61The Productivity Commission was the only witness firmly opposed to the ACCC-proposed reforms to the merger review regime.
4.62In its most recent 5-year productivity inquiry, released in March 2023, the Productivity Commission stated that ‘it is unclear whether the need for legislative reform would remain if the regulator [the ACCC] were to augment its approach to litigation’. The Commission cited Federal Court findings that the ACCC’s use of economic theory and modelling was ‘unconvincing’ on merger cases, given the commercial realities facing businesses. The Commission added that mergers could enhance productivity by better allocating resources ‘so long as the market remains competitive’. TheCommission also stated that the proposed reforms placed ‘a great deal of power with the regulator, necessitating some other avenue of accountability’. It told the Committee that:
on merger policy, we conclude that, overall, there doesn't appear to be a strong case for the implementation of a new formal authorisation regime of the kind proposed by the former chair of the ACCC. Instead, we think that there may be more value in the ACCC further considering its internal merger review processes and government considering how best to avoid perverse incentives across merger clearance procedures.
Merger policy: the path forward
4.63Treasury advised that the current merger regime would be an ‘immediate focus’ of the current Competition Review. The review would examine whether the current arrangements remain fit for purpose, particularly in the digital age, and would consider all options, from maintaining the status quo through to adopting the ACCC’s proposed reforms. Treasury told the Committee that:
Mergers can be an important means for improving productivity by capturing synergies, achieving economies of scale or embedding superior management practices in the merged business. However, today we have a better appreciation of potential costs to consumers and the broader economy of mergers that reduce competition, both here and internationally. This reflects better data and more detailed ex post reviews by the ACCC.
At the same time, digital data technologies are changing the way that businesses interact with the marketplace, which can make consumers more vulnerable for a given level of market power. Mergers policy has always been risk based, so it's appropriate to reconsider a policy as risks and the opportunities for managing them can change over time. We will be looking at all options, ranging from maintaining the status quo to the various reforms proposed by the ACCC. We'll also be consulting publicly with stakeholders and commissioning data analysis to help both the government and the community decide how best to go forward.
4.64This would indicate that pre-merger notification be required at a stage of interaction such that it would not unduly impact on discussions between firms that may lead to productive mergers.
4.65That, above a suitable threshold, pre-merger notification to the Australian Competition and Consumer Commission should be required.
4.66That the Treasurer’s Competition Policy Taskforce examine whether, above an appropriate threshold, merger transactions should be suspended from completion without Australian Competition and Consumer Commission clearance.
4.67That the Treasurer’s Competition Policy Taskforce examine the suitability of the current merger test.
Labour mobility
4.68As discussed in Chapter 3: Key empirical findings, labour mobility refers to the propensity of the average worker to change jobs and is an important factor in economic dynamism. The percentage of workers taking on new jobs each year is declining, raising important questions about barriers to labour mobility, which include non-compete clauses, non-poach agreements, and differences in occupational licensing.
4.69The Committee heard that declining labour mobility had been shown to be a relevant factor in Australia’s productivity slowdown and reduced wage growth. The e61 Institute observed that:
…the leading Australian studies about productivity slowdown show that about one-quarter of the productivity slowdown is accounted for by the decline in labour allocation from less productive to more productive firms. That's very much connected to the decline in job mobility we've seen in the economy…. Anything that basically slows down that productivity enhancing reallocation is going to be bad for wages. We also know that productivity growth is driven by what happens within firms. We know, for instance, in a more competitive environment where basically more start-up firms are entering and so forth, that places indirect pressure on incumbents to innovate and adopt new technologies. When we have less created destruction and we have less mobility in the economy there is going to be less pressure on incumbent firms to do those good things that lift their productivity.
4.70The Committee also heard from Treasury that US research indicated that new-entry firms were the biggest losers from constraints on labour mobility, such as non-compete clauses. This is because such firms rely on picking up workers with the latest skillsets. Constraints on labour movement thus ‘make it more difficult for them [new entry firms] to compete’ with incumbent firms.
4.71The importance of declining labour mobility meant the inquiry was focused on what changes could make it easier for workers to switch jobs. In particular, the inquiry received evidence that removing or limiting the use of non-compete clauses would help remove an increasing barrier to labour mobility.
4.72The Committee notes that the current Competition Review includes consideration of non-compete and related clauses that restrict workers from shifting to better-paying jobs.
4.73It is important to view labour mobility in a broader policy context. While boosting job switching may increase productivity, it is important to supplement this with appropriate supports such as targeted social insurance and access to mid-career training opportunities.
Non-compete clauses
4.74A non-compete clause is a clause in a contract where an employee agrees not to work for an employer in a similar industry or area for a period of time after their employment with the first employer finishes. These clauses can prevent an employee moving to a rival firm but can also prevent an employee from starting up a competing firm.
Prevalence in the Australian context
4.75The e61 Institute, in collaboration with the Susan McKinnon Foundation, surveyed 3,000 Australian workers who had changed jobs over the 12 months to May 2023. The survey, conducted online, indicates that at least one in five Australian workers is subject to a non-compete clause, while one-half of the workforce is subject to a post-employment restraint. The prevalence of non-compete clauses differs depending on occupations. Managers have the highest level of exposure at 39 per cent, while clerical workers and labourers have the lowest at 14 per cent.
4.76The e61 Institute also obtained qualitative evidence from legal practitioners, which revealed that non-compete clauses now apply to outward-facing customer roles—childcare workers, yoga instructors and in-vitro fertilisation specialists for example—and have become more prevalent over time. Indeed, non-compete clauses are now a default option in many employment contract templates.
4.77In response to a question about its confidence levels in the online survey results, the e61 Institute told the Committee that the United States’ experience indicated that online polls were a reliable gauge. The Institute said that it expected the true prevalence of non-compete clauses in Australia to be even higher than suggested by the survey results, explaining it thus:
I think the US experience is very instructive here. In 2014, Evan Starr and fellow coauthors conducted a similar exercise in the context of an online poll of 11,000 US workers. We've taken the same questions from that original measurement. They found that 18 per cent of US workers were subject to non-competes. Three years later, the Bureau of Labor Statistics in the US conducted a more efficient survey in the context of their more robust sampling methods. They found exactly the same result in terms of prevalence. These online polls can provide a reliable gauge. Secondly, these online polls have been asking workers about their experience of non-competes. There is a question about awareness here. One of the things we do in our poll is only ask those workers who've changed jobs within the last year about their exposure to non-competes. If anything, that's going to understate prevalence, because if a non-compete actually prevents you from moving then we're not going to pick that up. The second thing to note is that international experience suggests that those surveys that basically approach firms instead of workers tend to yield higher estimates of prevalence. If anything, our estimate of 22 per cent is probably a low amount and we suspect it could plausibly be higher than that.
4.78The e61 Institute told the Committee that ‘this rise in non-competes has the potential to explain some portion of that part of the productivity slowdown led by a decline in job mobility’.
4.79Similarly, Treasury told the Committee that ‘internationally there is growing evidence that non-compete clauses are hampering job mobility, innovation and wages growth’.
The ‘chilling effect’ of non-compete clauses
4.80Non-compete clauses are by default not enforceable unless the employer can demonstrate the clause goes no further than is reasonably necessary to protect the employer’s legitimate business interest. However, the Committee has heard that non-compete clauses do not need to be enforceable or end up in court to exert a ‘chilling effect’ on labour mobility.
4.81The Committee heard that evidence from the United States indicates 40 per cent of workers report turning down a job offer from a competitor because of a non-compete clause, even though they reside in a state where non-compete clauses are unenforceable.
4.82Related to this, inequality in bargaining power between workers and employers and uncertainty were highlighted as reasons for the ‘chilling effect’ caused by non-compete clauses. The e61 Institute stated that:
There is very much an inequality there and a lot of legal uncertainty around these. What we know is that when there's uncertainty it tends to bind more legally those with less bargaining power. If you're earning $60,000 or $70,000 a year and a HR department in a large firm tells you can't change jobs when you try to because of a non-compete, you're not going to have the resources to challenge that in court. I think those big differences in bargaining power we see in our economy really underline this chilling effect. It means that even if a non-compete doesn't go to court it could significantly change the behaviour of workers.
Overseas governments are taking action
4.83The Committee heard that overseas governments are now taking action to limit the use and impact of non-compete clauses.
4.84In the US, the Federal Trade Commission (FTC) is proposing a law banning non-compete clauses in most employment agreements. The FTC has cited the harmful effects on workers and competition, and says the ban could increase wages by nearly US$300 billion per year and expand career opportunities for about 10 per cent of the population.
4.85The UK has announced it will legislate statutory limits of three months for non-compete clauses.
4.86In New Zealand, a bill before parliament would prohibit the use of restraints of trading and employment agreements for employees who earn less than three times the minimum wage.
Shifting the burden of non-compete clauses
4.87Overall, witnesses viewed non-compete clauses as often being applied in a manner for which they were not intended, or as influencing workers to behave in a way counter to their own interests. Accordingly, witnesses saw non-compete clauses as representing a significant barrier to labour mobility, with all agreeing that policy reform is important.
4.88The Productivity Commission highlighted the need to minimise the use of such clauses to improve economic dynamism.
One additional example of labour market reform not covered in the Productivity Inquiry is in minimising the use of non-compete clauses in contracts. Currently, in Australia non-compete clauses are by default not enforceable (unless the employer can demonstrate that they go no further than reasonably necessary to protect the employer’s legitimate business interests) but workers may not know this, or may not be willing to bear the cost of legal action to avoid being bound by a non-compete clause. It may be more effective for the default to be non-compete clauses do not exist, unless the firm can prove a clause is integral to protecting their interests.
4.89The e61 Institute told the Committee that the evidence showed that the onus should shift on to the proponents of non-compete clauses to demonstrate why they are needed.
Honestly, we need to shift the burden here and to have it such that proponents of non-competes should actually justify why they exist. Based on all the evidence we see, there's a very strong economic evidence base that suggests they're problematic. I think that the burden should be on the proponents to demonstrate why they are important and why they're in the national interest. I just don't see that based on the body of evidence we have currently internationally and increasingly domestically.
4.90That the Treasurer’s Competition Policy Taskforce review the prevalence and economic impact of non-compete clauses, including whether such clauses:
- are commonly used in inappropriate contexts; and
- act as a constraint on people changing jobs and thereby dampen the level of dynamism within the overall labour market.
4.91That the Treasurer’s Competition Policy Taskforce should consider the appropriateness of constraints and bans on non-compete clauses and other restraint of trade clauses.
Young firms
The disproportionate impact of declining dynamism on young firms
4.92An indicator of falling economic dynamism is a relative lack of entry by new firms bringing fresh ideas, greater competition and the incentive for incumbents to ‘invest and adopt new technologies’. This in turn contributes to reduced productivity and investment.
4.93The Committee heard from a variety of witnesses that the decline in economic dynamism in Australia reflects the tough business environment facing start-ups and new firms.
Witness views
4.94The e61 Institute pointed to its research which shows that growing firms tend to be younger and account for about ‘40 per cent of aggregate net job creation in the Australian economy’. Accordingly, any impediments to the ability of young firms to upscale potentially creates ‘large macroeconomic costs’.
4.95Additionally, the e61 Institute continued, lower levels of dynamism excessively affect the wages of younger workers. This is for two reasons:
- First, young workers ‘rely disproportionately on job-to-job transitions to establish a good match’. So, given the decline in fluidity and mobility in labour markets—a current indicator of declining dynamism in Australia—this would ‘hurt younger Australians more’.
- Second, ‘young workers are more likely to work for younger firms. When there are fewer young firms in the economy, by definition that creates fewer opportunities for young Australians’.
- In a similar vein, the Organisation for Economic Co-operation and Development (OECD) told the Committee that young firms were ‘the engine of growth in most OECD countries’, contributing in particular through innovation and job creation.
How to improve conditions for new-entry businesses
Tech sector
4.97Given the plethora of young small firms in the tech sector, the Tech Council of Australia was well placed to propose several ways to facilitate a better environment for the growth of new firms.
4.98First, the Tech Council submitted, regulatory frameworks should be improved in the financial sector to reduce barriers to entry and enhance consumer outcomes. Key areas for reform are ‘modernised privacy laws…positioning Australia as a world leader in cyber security…informed, targeted and proportionate regulation of emerging technologies…economy-wide competition and consumer protection laws underpinned by effective enforcement…targeted and risk-based security regulation [of the financial technology sector]…payments system reform’ and an industrial relations system enabling fit-for-purpose flexible employment.
4.99Second, investment in start-up technology firms seeking to scale up could be improved through:
- Creating a more friendly environment for foreign venture capital investment in Australia (see Chapter 6: Finance).
- A tax environment that ‘rewards investments in innovation and technology’ and reduces the complexity of the Research and Development Tax Incentive for software to level the playing field for smaller companies.
- Additionally, the Tech Council told the Committee, the tech jobs pipeline could be strengthened through raising awareness of pathways into tech jobs and careers. This could be achieved through reforming training to ensure it is relevant and responsive to current needs (for example, through defined skills standards and pathways, the establishment of a digital apprenticeship model, and improved integration of industry certifications), and through increased diversity in the tech sector (particularly greater representation of women).
- Zepto, a fintech payments company, observed that making government procurement processes more transparent and accessible for smaller players would make a ‘massive difference’ in enabling new firms to compete with larger businesses and to ‘take that step up to the next level and become a larger and more successful business’. Procurement is discussed in more detail in Chapter 5: Government.
Harnessing talent
4.102The Grattan Institute advised that reforms to the skilled migration program could support the growth of a more dynamic entrepreneurial culture, conducive to the growth of young businesses. However, the Grattan Institute continued, any new visa categories should be introduced only in a graduated way and be subjected to careful evaluation.
If we are going to go down this path of creating innovation visas, for example, the program should start incredibly small and we should evaluate it really carefully. The opportunity cost here is all the other skilled migrants that we don't otherwise bring in with those limited number of visas on offer. We know from Treasury's work that, for example, a skilled employer sponsored visa holder, a primary visa holder—the primary applicant—brings a fiscal dividend alone, ignoring any productivity benefit, of about $400,000 to $500,000 discounted over their lifetime to Commonwealth and state governments. That is a lot to give up in order to take a punt on someone. You want to start small and evaluate. The same way a VC would evaluate a portfolio of options, we should be doing that with our migration program with respect to innovation and entrepreneurship.
…
That means making the system as non-bureaucratic as possible and getting rid of that red tape. As the chair mentioned earlier, some people favour a wave threshold idea for skilled migration. That's us. That is opposed to having occupation lists and the like. That would be number one. That would, frankly, make the most difference, I think. If you are an Atlassian or a small-scale Atlassian and you're trying to get someone who has had seven years of experience in a particular role to run a team and launch a new product—not many of those people exist in Australia—literally the only place you're going to get that is from abroad. You want to make that as simple as possible.
4.103Similarly, the Tech Council of Australia highlighted the importance of reforming migration settings to enable firms to more easily introduce the ‘high-skilled global talent they need to be more productive and successful’. The Council’s feedback from its members showed that importing such workers has the additional benefit of rapidly imparting advanced technical knowledge and skills transfer into the workforce.
4.104The importance of young firms for driving both competition and economic dynamism is reflected in a number of recommendations throughout this report. For example, it is reflected in sector specific recommendations in relation to banks, fintech, aviation and retail. In all cases, removing barriers to entry will improve sector-wide dynamism by facilitating firm entry and create new employment opportunities, particularly for young people.