ACTU: A Shrinking Slice of the Pie

Artwork by Peter Lake.

The ‘wages breakout’ has been a recurring theme in the Australian public policy debate in recent years. Political conservatives, media commentators and some business groups have warned that Australian wages growth is unsustainable, or threatens to become unsustainable (for example, see The Australian 2010). This paper critically examines such claims and finds that they are not supported by the evidence.

Warnings about a ‘wages breakout’ appear to refer to a period in which real wages growth exceeds productivity growth, thus causing the labour income share to rise. This paper shows that Australia has experienced the opposite of a ‘wages breakout’ since 2000.  Over this period Australian real wages have not kept pace with productivity growth. This means that labour’s share of total income has fallen and capital’s share has risen. We would now need a period in which real wages rose faster than productivity growth merely to restore the labour income share of the 1990s.

This paper also shows that many other OECD countries have experienced a falling labour share in recent years, but the fall in Australia’s labour share has been relatively large.  The fall in the Australian labour share has been broadly-based – the labour share has fallen within a broad range of industries. Only a small portion of the fall can be ascribed to structural change in the economy towards low-labour share industries such as mining.

The decoupling of real wages and productivity, and thus the fall in the labour income share, is a worrying development. One key implication of this fall is that household income inequality will tend to rise, as capital ownership is highly unequally distributed among households.

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A Shrinking Slice of the Pie report (pdf)