Wages and profits

There was a story buried deep in the Dominion-Post this morning that caught my eye.   The heading was “Profits up as wages stand still“,  and the article was prompted by the release yesterday by Statistics New Zealand of some summary results from the Annual Enterprise Survey.

In their media release yesterday, SNZ –  true to their apparent policy of accentuating the positive – was at pains to highlight the increase in profits over the 2015/16 year.   Overall, operating profits in the business sector had risen by 8.6 per cent –  rather faster than the increase in nominal GDP.

But it was this chart in the SNZ release that caught my eye

profits AES

Profits had certainly increased quite a bit  in 2015/16, but look at that top line.  Total profits in 2015/16 were no higher ($bn) than they had been in 2011/12, and yet over that period nominal GDP had increased by just over 17 per cent.  On this measure, profits as a share of GDP would have fallen quite a bit over those four years.

In the Dom-Post article,  the journalist had juxtaposed the increase in profits over the last year with the very weak increase in wages, at least according to the Quarterly Employment survey.  Lobby group representatives were quoted in a fairly predictable way.

Council of Trade Unions economist Bill Rosenberg said the statistics were more evidence that the share of income going to wages and salaries was falling.
“That indicates wages are not keeping up with what the economy’s income could actually afford.”
The share of income going to wages in New Zealand was low internationally, he said. “To see it fall further is very disturbing. It is an indication we are a low-wage economy.”


Kirk Hope, chief executive of BusinessNZ, said the increase in company profits meant jobs were more secure.
It was also positive for “the many thousands of New Zealanders”, including Kiwisaver investors, who now owned shares and who would be receiving increased dividends, he said.
“Wage growth is not the only responsibility companies must address.
“A proportion of company profits must be reinvested to safeguard the future existence of the company; without that investment there will be no ability to maintain or grow jobs.”
Business profits can jump around significantly from year to year, but even taking a longer-term view, Statistics NZ figures show they appear to be greatly outstripping pay rises.

And when the journalist did take a long-term perspective, he looked at profit increases since 2009, and compared them to wage increases since then, even though 2009 was the worst of the severe recession, and profits are typically much more cyclically variable than wages.

But, as I noted in a post the other day, if one uses the more-stable and better-constructed Labour Cost Index measures, it looks as though real wages in recent years have been materially outstripping the (non-existent) productivity growth.    Real wage inflation hasn’t been high in absolute terms, but it has been a lot faster than any gains in productivity.

real wages and productivity growth

In the wake of that post, I’d also gone back and dug out from the national accounts the data on the wages and salaries (“compensation of employees”) share of GDP.    The data go all the way back to 1972.


Broadly speaking, the national accounts suggest that the labour share of GDP has been increasing for almost 15 years now (the latest data are the year to March 2016).    Even from the peak of the last boom (year to March 2008) to now, the labour share of GDP has increased a bit further.

And it isn’t because more people are working more hours.   Here is a chart of hours worked per capita.

hours per capita

Total hours worked per capita are still slightly below the previous cyclical peak.   To the extent that the labour share of GDP has been increasing, it looks to have been a result of relatively good (relative to productivity) increases in wages.

As for profits, they are (more or less) the inverse of the labour share of income: they’ve been falling over the last 15 years.

Overall economic performance remains dismal, redeemed only by the strength of the terms of trade.  But relative to that disappointing performance –  weak productivity growth, growth skewed to the non-tradables sector –  labour (as a whole) doesn’t seem to have been missing out.

19 thoughts on “Wages and profits

    • Where can I find a definition of ‘participation’? I’m thinking about part time work and in particular working pensioners. Are the non-participants children, unemployed adults and the retired? Are numbers skewed by differences in birth rate, school leaving age, retirement age, life span and benefits based on participation such as WFF? Is being a student considered as 12 months of participation? Is this permanent residents only?

      If participation means we are avoiding the benefits culture found in the UK great. But hard work for low wages is less exciting if you are the worker not the academic collecting the numbers.


    • I am assuming that this comment is satire?

      We currently have near record terms of trade – if that wasn’t happening then New Zealand’s dismal economic performance would be exposed and plain to see – even for audiences that are wowed by simple lines on a chart.


    • I agree that the utopian idea of productivity is full AI robot automation of manufacturing and of services is not necessarily the best for society. Increasingly economists are recognising this as a significant problem for society. More a negative rather than a positive. The longer we delay full automation and the adoption of AI robots and automation the better. Gareth Morgan and his TOP party is also putting forward policy of Universal payments for everyone as more and more people become redundant from the working force due to the increasing use of AI robotic automation.


  1. Bob don’t know what you mean by hard work for low wages. Most wages are in NZ are based on a fair return for a fairs day work based on the workers skill and education level. In NZ we have one of the worlds highest minimum wage rates, we have one of the most generous social welfare programs that tops of the low incomes.

    You could argue that in the non-tradeable sector, like education, they have captured more than their fair share as the non-tradeable sector has ballooned out to a disproportionate size in many parts of NZ..

    What this chart shows is that despite 75,000 net immigration, and all those other factors you mention the economy is growing very strongly, which means more wealth and higher wages.


  2. I suppose Wascally Wabitt you must be in the non-tradable sector where everything is “dismal”.

    But if say you worked in the tradable sector that is creating the wealth for the non tradable sector to feel dismal in, you may say the terms of trade are wonderful, especially if the terms of trade are an effect not a cause.

    Or are you a UBI man, where the wealth is created by socialism 🙂


    • What a confused comment – the export sector doesn’t set the terms of trade, take a look at what it means to be a price taker and lift yourself out of a firm-level point of view where individual exporting firms may be enjoying some success through unique IP or some other form of competitive advantage but these firms are rare and certainly not of sufficient number or scale to improve the economy’s performance as a whole.

      As Michael has pointed out on his blog and what many other economic commentators have also pointed out New Zealand’s non-tradeable sector has been generally doing pretty well over the last while so wouldn’t necessarily feel “dismal” for those who are part of it and hence why those that inhabit that environment probably fall for the “rock-star” schtick or simple charts with trends that point upwards for economic illiterates to get excited about.


    • The export sector is only a $61 billion industry of which total NZ GDP is $250 billion. Of that $61 billion, $15 billion is mainly in International students and the tourism sector. What actually feeds back into the local domestic industry is only about 30% of that $46 billion export tradeable sector which is about $14 billion. The export sector without International students and tourism does not matter too much to the NZ economy. You can drop the rural farming sector entirely and the NZ economy may not even notice as it did not notice too much when Dairy milk prices dropped by 60%.


  3. Terms of Trade – General
    Terms of trade, is a term that represents the prices of the exports of a country, relative to the prices of its imports; the ratio is calculated by dividing the price of the exports by the imports, with the result then being expressed as a %. When a country’s Terms of Trade is less than 100%, more capital is going out than coming in. When the Terms of Trade is greater than 100%, the country is accumulating more money from exports than it is spending

    Terms of Trade – Specific – NZ
    NZ terms of trade provides a more detailed reading of the flow of goods and services across the border than the monthly merchandise trade series because it shows how much changes in the value of exports and imports is driven by price and how much by volume. The value of exports rose 3.4 per cent to $11.8 billion, seasonally adjusted, in the first quarter, while the value of imports rose 6.2 per cent to $13.2b but export volumes fell 4.2 per cent while import volumes rose 1.2 per cent.

    NZ Exports rose to $11.8 billion – prices fell -0.8% – volumes fell 4.2%
    NZ Imports rose to $13.2 billion – prices rose +6.2% – volumes rose 1.2%

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  4. I’m sorry you feel so darkly about all those small firms out there, the thousands of dairy farmers, the thousands of sheep farmers, the thousands of beef farmers, the kiwi fruit farmers, the hundreds of vineyards, and the myriad other small firms creating the wealth we live off. As far as I was aware most of these small businesses are using world leading technology and are recognised as such all round the world. They are also some of the most productive and efficient firms in their sectors in the world too.

    Sorry they are not doing as well as you think they should be doing but happy to hear your thoughts on where they should be redeployed, perhaps they should be collectivised, or retrained as software programmers developing WW2 games for the youth of today.

    Personally I don’t think Stephen Topliss should be described as an economic illiterate but everyone is entitled to an opinion. As for the trend, looks good to me especially as it started in 1992 and Micheal is usually fond of the ones that point the other way. 🙂


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  5. Thanks Iconoclast for that definition of the Terms of Trade. I guess we are price takers on both sides of that equation?

    Correct me if I’m wrong but if we took out of Imports all the things that the non tradable community brings in, like Samsung Phones, BMW’s, 50″ TV sets, sofas, French Champagne, etc etc then our Terms of Trade would look rather good…. but the good people of Auckland would be rioting in the streets having to live on basic necessities ?????


  6. Profits flow to people so I guess the labour share should be considered alongside wealth distribution or more broadly, the question of how income and wealth distribution impacts aggregate demand; seems odd that the data indicates growing unit labour costs – so why the low inflation? also, was thinking the capital share of income is set against the volume of capital invested which, per trends in business investment, seems to have been weak: can it be inferred returns on capital have been increasing? perhaps the stock markets offer a clue – despite the lack of labour productivity, new highs seem a weekly occurrence….


  7. rising real unit labour costs isn’t inconsistent with low inflation, so long as one’s model of inflation is a labour cost driven cost plus approach.

    I guess the nZ stock market is pretty unrepresentative of the wider economy so I wouldn’t put very much weight on that. Over 15 years or so,the national accounts data suggests the profit share of GDP has been falling.


  8. Someday, oneday, probably never, a government will smarten up and tighten the rules around migration and employment and simply test that at the end of 5 years they have earned in total at least $350,000 in reported and taxed income. How many of the 300,000 that have arrived in the last 5 years have disappeared into the black economy? or working in a menial job?. Nobody knows. Yet after 5 years they can front up and obtain a New Zealand passport and all that goes with it. – Repeat – nobody knows – even government does not know


    • The last census count was 25% of our population or around 1m people were migrants of varying periods. I work out that the average churn rate as around 1:5 ratio. ie we keep 1 out of every 5 migrants. Therefore a target of 50k new migrants annually results in only 10k that will remain NZ within 5 tears due to the lack of career development opportunities from a very small population base.


    • I had to increase one of my recently employed student work visa employees from $30k to $33k because the minimum wage went up and then I had to give her another pay rise to $37k because immigration told her that the market rate for a book keeper should be between $37k and 75k. Therefore my local kiwi boss has to sacrifice his own wage so that migrant workers get a payrise. I think that defeats the intent of using cheap migrant labour if we keep raising the minimum wage for migrant workers?


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