Productivity improvements needed for higher wages

Paul Conway

report released today by the Productivity Commission shows that when productivity goes up wages tend to follow.

The growth of labour productivity and wages has slowed. Between 1996 and 2000 the average amount produced from one hour of work in the private sector (labour productivity) grew by 2.62% a year and real wages grew by 2.17%. This compares with the period 2008 to 2016, when growth in labour productivity and real wages were just 1.15% and 0.86% a year respectively.

While labour productivity is a key factor behind wage growth, it is not the only one. The extent to which increases in national income accrue to the owners of labour or capital (the labour income share) also has an impact. Changing technology, globalisation and policy changes can all impact on the labour income share.

The report, “The Labour Income Share in New Zealand: An Update”, thus shows how the share of income going to labour has changed between 1978 and 2016. The labour income share mostly declined in three short bursts: 1982-1984, 1992-1995, and 1999-2002. Outside of these periods any decline has been gradual. Data on 16 industries from 1996 to 2016 showed a fall in the labour income share from 57.4% to 55.6% of national income.

As Paul Conway, the Productivity Commission’s Director of Economics and Research said: “while international comparisons of these data are difficult, this suggests that New Zealand has not experienced the significant falls in the labour income share seen in other countries over the last two decades.”

Looking forward, the potential for new technology to disrupt labour markets is unlikely to end anytime soon. In meeting this challenge, policy should seek to improve the flexibility and resilience of the economy. The emphasis should be on adapting to change, rather than resisting it.

As Huon Fraser, the report’s author, said: “To spread the gains, the education system needs to provide workers with the skills necessary to make the most of new technology. Investing in the complementary skills necessary to win the “race between education and technology” is critical to helping people benefit from new technology while minimising any harmful effects.”