Workplace Relations Lecture Series Fair Work Commission Centre for Employment & Labour Relations Law Melbourne, 16 August 2013 Productivity and pay: Developments & issues in labourβs share of income gains Dean Parham Deepa Economics [email protected] Definitions β’ π πππ πππππ’ππ‘ ππππ = β’ πΏππππ’π πππππ’ππ‘ππ£ππ‘π¦ = πΏππππ’π πππππππ ππ‘πππ 1 . π»ππ’ππ π€πππππ πππππ’ππ‘ ππππππ ππππ’ππ ππ ππ’π‘ππ’π‘ π»ππ’ππ π€πππππ β’ π πππ π’πππ‘ πππππ’π πππ π‘π = π πππ πππ π‘π ππ πππππ’π ππππ’ππ ππ ππ’π‘ππ’π‘ π πππ πππππ’ππ‘ ππππ = πΏππππ’π πππππ’ππ‘ππ£ππ‘π¦ β’ π πππ π’πππ‘ πππππ’π πππ π‘π = πΏππππ’π ππππππ π βπππ Productivity and pay 2 Takeaway β’ πΊπππ€π‘β ππ πΏπΌπ = ππππ€π‘β ππ π ππ β ππππ€π‘β ππ πΏπ β’ πΏπΌπ β π€βππ ππππ€π‘β ππ π ππ < ππππ€π‘β ππ πΏπ β’ πΏπΌπ β π€βππ ππππ€π‘β ππ π ππ > ππππ€π‘β ππ πΏπ Productivity and pay 3 Rule of thumb β’ LP growth a benchmark for real wage growth β’ Increases in nominal wages has regard to growth in labour productivity and inflation β’ When growth in real wages above growth in LP o raises real production costs β’ reduces competitiveness β’ pressure to reduce employment β’ When growth in real wages below growth in LP o reduces real production costs β’ improves competitiveness β’ conducive to employment growth o question of fairness β equitable share of productivity gains Productivity and pay 4 The terms of trade lifted income growth above output growth in the 2000s % growth since 1959-60 index 2010-11=100 700 130 600 GDI growth 110 500 400 300 90 GDP growth 70 200 100 terms of trade (RHS) 0 50 30 Data source: ABS national accounts Productivity and pay 5 The terms of trade filled the gap in average income growth left by slower productivity growth % growth since 1993-94 index 2010-11=100 70 60 180 real average income (GDI per capita) 50 40 160 140 labour productivity 120 30 100 20 80 terms of trade (RHS) 10 export prices import prices 0 60 40 Data source: ABS national accounts Productivity and pay 6 Takeaways β’ Continued strong growth in prosperity in the 2000s β’ A surge in the terms of trade βfilled a gapβ left by slower growth in productivity β’ The terms of trade had a major influence on the growth in real income and rate of improvement in living standards Productivity and pay 7 The fall in the labour income share β’ 4+ percentage points over the 2000s β’ How did this fall come about? Productivity and pay 8 No shrinkage in labour income growth % per year 8 7.5 7 6.6 5.8 6 5 4.9 4.5 4.3 4 3 1990s 2000s 1990s 2000s 1990s 2000s 2 1 0 Labour income Capital income Total income Source: Parham (2013) forthcoming Productivity and pay 9 Stronger output price inflation, not slower wage growth % per year 5 4 4.8 3.8 3.4 3 2.7 nom wage nom wage 2 RPW output prices 1.4 1.1 RPW 1 output prices 0 1990s 2000s Source: Parham (2013) forthcoming Productivity and pay 10 Terms of trade drove a wedge between product prices and consumer prices index 1999-00=100 200 160 product prices 120 consumer prices 80 1990s 40 2000s 2011-12 2009-10 2007-08 2005-06 2003-04 2001-02 1999-00 1997-98 1995-96 1993-94 1991-92 1989-90 1987-88 1985-86 1983-84 1981-82 1979-80 1977-78 1975-76 1973-74 1971-72 1969-70 1967-68 1965-66 1963-64 1961-62 1959-60 0 Source: Parham (2013) forthcoming Productivity and pay 11 Real consumption wage β’ π πΆπ = πππππππ ππ£πππππ βππ’πππ¦ π€πππ πΆπππ π’πππ ππππππ Productivity and pay 12 Growth in RPW fell behind LP growth. RCW did not % per year 3 2.7 2.5 2.1 2.0 1.8 2 1.5 1.4 1.5 1 RPW LP RCW RPW RCW LP 0.5 0 1999-00 to 2009-10 2002-03 to 2011-12 Source: Parham (2013) forthcoming Productivity and pay 13 Implications for the rule of thumb β’ Not a problem for producers o competitiveness β’ What about fairness? o real consumption wage is relevant o growth in RCW kept up with, and surpassed, growth in LP Productivity and pay 14 Sources of the fall in labour income share β’ Additional growth in income o 40% in mining o 25% in construction β’ Manufacturing lost the most share of income β’ Mining explains the entire fall in the labour income share o Other industries much smaller and offsetting contributions Productivity and pay 15 Mining essentially explains it all % pt contributions 0.8 RPW 0.6 LP 0.4 LIS 0.2 0.0 -0.2 -0.4 -0.6 -0.8 Arts Finan Telco Transp Accom Retail Wsale Constr EGWWS Manuf Mining Agric -1.0 Source: Parham (2013) forthcoming Productivity and pay 16 Implications for wage setting β’ Could wage rises be quarantined to the mining industry? β’ βHeadroomβ -- scope for wage growth within bounds of LP growth β essentially confined to mining β’ Prices variable, wages βstickyβ downward β’ Fairness of sharing resource rents with mining workers only β’ Fall in labour share is predominantly a βquantityβ effect β increased capital intensity β and not a price effect β profits v. wages β’ Basis for wage increases to raise labour share not clear Productivity and pay 17 Looking forward β’ Labour income share likely to rise without any action o Lower mineral export prices will raise RPW growth above LP growth β’ LIS will not fully revert o Economy is more capital intensive o Will thereby take a larger share of income β’ Growth in consumption prices greater than growth in product prices o Growth in RCW less than growth in RPW o Growth in RCW still in line with growth in LP?? Productivity and pay 18 Concluding remarks β’ Terms of trade had a large effect on income growth and the labour share of income β’ Need to take care with the usual βrules of thumbβ when there are shifts in the terms of trade β’ Need to distinguish between real wages as a cost to producers (RPW) and real wages as income to labour (RCW) β’ RPW the indicator re production efficiency criterion and RCW the indicator re fairness criterion β’ Focus on productivity growth to continue growth in living standards and to sustain growth in wages Productivity and pay 19
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