Productivity and pay: Developments &

issues in labour’s share of income gains

Dean ParhamDeepa Economics

parham.dean@gmail.com

Workplace Relations Lecture SeriesFair Work Commission

Centre for Employment & Labour Relations LawMelbourne, 16 August 2013

Productivity and pay 2

Definitions

¿𝑅𝑒𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑊𝑎𝑔𝑒𝐿𝑎𝑏𝑜𝑢𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦

Productivity and pay 3

Takeaway

Productivity and pay 4

Rule of thumb• LP growth a benchmark for real wage growth• Increases in nominal wages has regard to growth

in labour productivity and inflation• When growth in real wages above growth in LP

o raises real production costs • reduces competitiveness• pressure to reduce employment

• When growth in real wages below growth in LP o reduces real production costs

• improves competitiveness• conducive to employment growth

o question of fairness – equitable share of productivity gains

Productivity and pay 5

The terms of trade lifted income growth above output

growth in the 2000s

1959

-60

1961

-62

1963

-64

1965

-66

1967

-68

1969

-70

1971

-72

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

2011

-12

0

100

200

300

400

500

600

700

30

50

70

90

110

130

GDI growth

GDP growth

terms of trade (RHS)

% growth since 1959-60 index

2010-11=100

Data source: ABS national accounts

Productivity and pay 6

The terms of trade filled the gap in average income growth

left by slower productivity growth

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

0

10

20

30

40

50

60

70

40

60

80

100

120

140

160

180

real average income(GDI per capita)

labour productivity

terms of trade (RHS)

export pricesimport prices

% growthsince 1993-

94

index2010-11=100

Data source: ABS national accounts

Productivity and pay 7

Takeaways• Continued strong growth in prosperity in the

2000s• A surge in the terms of trade ‘filled a gap’ left by

slower growth in productivity• The terms of trade had a major influence on the

growth in real income and rate of improvement in living standards

Productivity and pay 8

The fall in the labour income share

• 4+ percentage points over the 2000s

• How did this fall come about?

Productivity and pay 9

No shrinkage in labour income growth

Labour income Capital income Total income0

1

2

3

4

5

6

7

8

1990s 2000s1990s 1990s2000s 2000s

4.5

6.6

7.5

4.9

5.8

4.3

% per year

Source: Parham (2013) forthcoming

Productivity and pay 10

Stronger output price inflation, not slower wage

growth

1990s 2000s0

1

2

3

4

5

nom wage nom wage

outputprices

outputprices

RPW

RPW

3.8

4.8

1.1

3.4

2.7

1.4

% per year

Source: Parham (2013) forthcoming

Productivity and pay 11

Terms of trade drove a wedge between product prices and

consumer prices1959-6

0

1961-6

2

1963-6

4

1965-6

6

1967-6

8

1969-7

0

1971-7

2

1973-7

4

1975-7

6

1977-7

8

1979-8

0

1981-8

2

1983-8

4

1985-8

6

1987-8

8

1989-9

0

1991-9

2

1993-9

4

1995-9

6

1997-9

8

1999-0

0

2001-0

2

2003-0

4

2005-0

6

2007-0

8

2009-1

0

2011-1

2

0

40

80

120

160

200

product prices

consumer prices

1990s 2000s

index1999-

00=100

Source: Parham (2013) forthcoming

Productivity and pay 12

Real consumption wage

𝑅𝐶𝑊=𝑁𝑜𝑚𝑖𝑛𝑎𝑙𝑎𝑣𝑒𝑟𝑎𝑔𝑒h𝑜𝑢𝑟𝑙𝑦 𝑤𝑎𝑔𝑒

𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑝𝑟𝑖𝑐𝑒𝑠

Productivity and pay 13

Growth in RPW fell behind LP growth. RCW

did not

1999-00 to 2009-10 2002-03 to 2011-120

0.5

1

1.5

2

2.5

3

RPW RPWLPLP

RCWRCW

1.4

2.12.0

1.5

1.8

2.7

% per year

Source: Parham (2013) forthcoming

Productivity and pay 14

Implications for the rule of thumb

• Not a problem for producerso competitiveness

• What about fairness?o real consumption wage is relevanto growth in RCW kept up with, and surpassed, growth in LP

Productivity and pay 15

Sources of the fall in labour income share

• Additional growth in incomeo 40% in miningo 25% in construction

• Manufacturing lost the most share of income• Mining explains the entire fall in the labour

income shareo Other industries much smaller and offsetting contributions

Productivity and pay 16

Mining essentially explains it all

Agri

c

Min

ing

Manuf

EG

WW

S

Const

r

Wsa

le

Reta

il

Acc

om

Tra

nsp

Telc

o

Fin

an

Art

s

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

RPW

LP

LIS

% pt contributions to market sector growth

Source: Parham (2013) forthcoming

1999-00 to 2009-10

Productivity and pay 17

Implications for wage setting

• Could wage rises be quarantined to the mining industry?

• ‘Headroom’ -- scope for wage growth within bounds of LP growth – essentially confined to mining

• Prices variable, wages ‘sticky’ downward• Fairness of sharing resource rents with mining

workers only• Fall in labour share is predominantly a ‘quantity’

effect – increased capital intensity – and not a price effect – profits v. wages

• Basis for wage increases to raise labour share not clear

Productivity and pay 18

Looking forward• Labour income share likely to rise without any

actiono Lower mineral export prices will raise RPW growth above LP growth

• LIS will not fully reverto Economy is more capital intensiveo Will thereby take a larger share of income

• Growth in consumption prices greater than growth in product priceso Growth in RCW less than growth in RPWo Growth in RCW still in line with growth in LP??

Productivity and pay 19

Concluding remarks• Terms of trade had a large effect on income

growth and the labour share of income• Need to take care with the usual ‘rules of thumb’

when there are shifts in the terms of trade• Need to distinguish between real wages as a cost

to producers (RPW) and real wages as income to labour (RCW)

• RPW the indicator re production efficiency criterion and RCW the indicator re fairness criterion

• Focus on productivity growth to continue growth in living standards and to sustain growth in wages