Prime Minister Scott Morrison says the government can use its migration powers to force people towards regional areas instead of Sydney and Melbourne.
Population Minister Alan Tudge has refloated a long-flagged idea to ban new migrants from living in Australia's two biggest cities for up to five years.
Mr Tudge addressed the need to ease congestion across road and rail networks in the nation's largest cities during a speech on Tuesday.
Migrants wouldn't only be restricted to regional areas but could also be pushed towards capital cities such as Adelaide, Perth, Hobart and Darwin.
Mr Morrison believes the government can push more new arrivals through non-permanent visas to make the plan possible.
"What we are talking about here is a very targeted use of our migration powers and migration program," the former immigration minister told reporters on Tuesday.
"You have no powers under the migration program to direct permanent migrants to live anywhere in the country, but for temporary residents ... the powers the Commonwealth has are very different.
"I am no stranger to this debate. I want to see our immigration program work for the strength of Australia."
Overseas migration accounts for 60 per cent of Australia's population growth, with nearly 90 per cent of skilled workers gravitating to Sydney and Melbourne.
Labor's employment spokesman Brendan O'Connor slammed the "thought bubble", saying there needed to be a more considered approach.
Mr O'Connor is also concerned unemployed locals are being undermined by overseas labourers and fears foreign workers are being mistreated by unscrupulous employers.
He believes federal, state and local governments must co-operate to tackle congestion in major cities.
"The idea that you just move people around out of capital cities - particularly when there are not job opportunities in those regions - is not a sufficient plan to ease congestion in our cities," Mr O'Connor says.
The restrictions would only apply to about 45 per cent of new migrants because 25 per cent are sponsored by specific employers and another 30 per cent are tied to family reunions.
Mr Tudge also plans to pursue better roads and transport connections, including fast rail, to ease the peak hour crush on highways and public transport in the major cities.
Better planning and population controls could claw back some of the $25 billion a year in lost economic activity due to city congestion.
Ben Oquist from the Australia Institute said the congestion issues pointed to successive governments failing to invest in infrastructure.
"I think that is a big worry to suggest some people are not going to be able to seek a better job in a bigger city," he said.
Australian Associated Press