CHART OF THE DAY: Here's Why Australian Wages Aren't Keeping Pace With GDP

The Productivity Committee has raised concerns over how Australian wages haven’t kept pace with GDP growth, following a decade of significant investment and productivity improvements in mining, agriculture, telecommunications and finance firms.

The agency studied the ratio of labour income to capital income in the 1990s and 2000s, and found a 4% fall in the labour income share (LIS) throughout the latter decade.

That means that GDP has increased more quickly than workers’ wages, which could be due to factors like technological improvements or a high AUD pushing export prices up.

The commission noted that a fall in LIS could lead to a more unequal distribution of wealth, as richer people are far more likely to have a share of capital income than the poor.

A low LIS could also hurt government tax revenues, because capital income is taxed at a lower rate than personal income.

On the other hand, the Productivity Commission noted that a lower LIS – implying lower wages for more productivity – could boost jobs growth, which could be important with unemployment tipped to rise in the coming year.

Other high-income countries like the US also experienced a decline in LIS, the agency found.

“Two explanations are prominent — globalisation and technological change,” it reported.

“Globalisation is seen to have reduced employment opportunities and wage growth in advanced economies, especially for middle-income and middle-skill workers, through a large increase in the world supply of cheap labour and of cheaper goods.

“Technological change is seen to have brought substitution of capital (especially information and communications equipment) for unskilled labour.

“The way in which the pain of the global financial crisis has been distributed has undoubtedly also had an effect.”

It noted, however, that those globally prevalent factors played a small role – if at all – in Australia, where the surge in commodity prices was the principal source of additional income and the fall in labour income share.

LIS grew in labour-intensive industries like manufacturing and construction.

With the AUD falling and terms of trade in decline, the Productivity Commission reported that labour income share would rise, although it was unlikely to reach previous heights.

“Action to restore the old labour income share or to recover ‘lost’ income share through wage rises would probably only have adverse consequences for employment and inflation and for industries already facing adjustment pressures,” it warned.

“With the prospect of declining terms of trade, a focus on productivity growth will be the way to sustain growth in real wages.”

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