Labour share of income

The other day I ran this chart showing how the labour share of income (“compensation of employees” in national-accounts-speak) had changed in New Zealand over recent decades.    COE

It isn’t data I usually pay any attention to, and I was somewhat surprised by the trend increase since around 2002.

And then I was reading a Financial Times article about last weekend’s Jackson Hole retreat for central bankers (perhaps including Graeme Wheeler) and assorted other eminent people.   The journalist mentioned that one prominent Asian central banker had warned that a declining labour share of income around the world could make problems for central bankers (the idea being that workers  –  especially low income ones – tend to spend most of their income, and demand shortfalls are a potentially serious issue, especially when the next recession happens).    And that left me wondering just how unusual New Zealand’s experience –  a rising labour share –  had been.

So I downloaded the OECD data back to 1970.    They have data for 25 advanced countries for the entire period (the exceptions are mostly the former eastern bloc countries).  Here is the share of GDP accounted for by compensation of employees for the median of those countries.

COE OECD

Slightly higher at the end of the period than at the start, and not very much change overall for the last thirty years.

And here is how the labour share has changed in the individual countries since 1970.

lab share since 1970

The median change is basically zero, but what is striking is how diverse the experiences of these advanced countries have been.  There are easy explanations for some of them –  Ireland’s change, for example, will reflect the company tax structure, which has encouraged (a) a lot of foreign investment, but (b) a lot of effort by multinationals to book profits in Ireland.  For Ireland, the labour share of GNI would be more enlightenning.  But for most of these countries the GNI/GDP gap is small, and yet there are still huge differences in the experience.

New Zealand –  like all the Anglo countries –  is towards the left of that chart.  But what about the experience since 2001, when the labour share of income troughed in New Zealand?  For that period, there is data for almost all OECD countries, not just the 25 in the earlier charts.

lab share since 2001

Over this period, not only is New Zealand near the right of the chart, but our experience has been quite different from that of the other Anglo countries.

This just isn’t my field, and I’m not pushing any particular interpretation of these data.  I simply found them interesting, and a little surprising.  But if they data are broadly correct, they do suggest that whether over 45 years or over the last 15, the overall labour share of income in advanced countries hasn’t changed much.  Of course, in most countries, productivity growth has been a lot slower than it was in the glory days of the post WW2 decades, and thus real wage growth will have been slower.  But the overall labour share hasn’t changed much –  and the differences across countries are much larger than the differences across (this period of) time for the advanced world as a whole.

These data also don’t shed any light on the inequality narrative.   Labour as a whole may have held its share of overall income, and yet differences in pre-tax market labour incomes may have become more pronounced (eg increases in chief executive salaries in the US or UK relative to median wages, or the rise of an extremely highly-remunerated subset of financial markets employees).     But if there are trends there, they haven’t been mirrored in a shrinking share of the cake going to labour as a whole.  Indeed, in New Zealand the labour share of income has increased quite a bit in the last 15 years or so (concentrated in the boom years of the 2000s, but not reversed since then).

And finally, another curiosity I stumbled on.   There is quite a sense that New Zealand’s labour market functions reasonably well and  –  in conjunction with counter-cyclical macro policy – delivers us unemployment rates that have been relatively low by OECD standards.    And I think that is probably not a totally inaccurate story –  who’d trade our labour market for that of Spain or Italy?

But here is a comparison of unemployment rates of Mexico and New Zealand

mexico U

Over the 25 years for which there is data for both countries, in only one –  at the height of the Mexican financial crisis –  did Mexico have an unemployment rate even slightly higher than that of New Zealand.   And if people suspect (as I do) that our long-run sustainable unemployment rate is getting down to around 4 per cent now, experience suggests that in Mexico it has been that low for decades.

Why mention Mexico?  Mostly because, despite its advantages –  oil, proximity to the United States, coasts on two oceans –  Mexico is a  relatively poor and (absolutely) not very productive OECD country.  Data are a bit patchy, but best indications are that Mexico’s productivity performance over the last 50 years has been even worse than that of New Zealand.    And yet, whatever the reasons, they’ve managed a system with consistently less unemployment than New Zealand has had (and, actually, even their prime age male participation rate is higher than that in New Zealand –  as perhaps one might expect in a materially poorer country).

14 thoughts on “Labour share of income

  1. I wonder what part legislation plays? The Employment Contracts Act was brought in in 1991 and its repeal and replacement by the Employment Relations Act was in 2000.

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    • Certainly one of the things to consider. Then again, I’d have thought the consensus view was that the change from ECA to ERA changed style/appearance more than it changed substance.

      One of my own ill-formed hypotheses is that the exchange rate is part of the story – it troughed in 2000. A high exchange rate and a high terms of trade probably facilitated wage increases running ahead of productivity. Arguably, given that business investment has been weak and there has been no growth in the export share of GDP, a rising labour share has been a symptom of our structural problems. Conceivably, a lower labour share in an economy with stronger investment and productivity growth could have left the typical worker better off than they actually are now.

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  2. …seems if there has been a skew of output toward the non-tradeable sector, the pattern in the first graph is logical i.e historical NZ employment growth within labour intensive services; tend to agree the wage distribution issue is simmering but ‘the solution’ isn’t obvious; skill/effort/commitment should link with rewards but how much should an executive team of a pulblic company earn relative to the people that keep their workstations consistently clean regardless of the ppssible inconsistent performance of the former..?

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  3. Do you know if the the measurement of Mexico’s unemployment rate is comparable to the measurement of NZ’s unemployment rate? Unemployment rates are largely meaningless in most developing countries, either because they aren’t well measured or because their labour markets are structured very differently (e.g. more informal work)

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    • I don’t know with any great confidence, but it is from an OECD database, and belonging to the OECD does require certain statistical standards to be met, and a household labour force survey is, i think, one of those requirements. the oecd even produces harmonised estimates to take account of modest differences in the way individual countries do their own calculations

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  4. Believing any stats from Mexico would be somewhat dangerous.
    Would be doubtful if they knew how many people lived there in much of the place and beside they have exported their unemployed to the USA for many years.

    The thing that strikes you there is the vast differences in wealth.
    Go the Las Vegas on Mexican Independence weekend and see all the private jets and the money changing hands. Amazing spectacle.

    Go behind the facade that is Mexico and see the real poverty. Not like ours.
    As an indicator. Two girls for dollar.
    No idea what you would come out like but doubt you would feel that healthy.

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    • Yes, maybe, but a lower unemployment rate in Mexico is consistent with (a) a minimum wage which is much lower, relative to median wages, than is the case in NZ, and (b) the absence of any sort of comprehensive unemployment benefit system.

      GDP per capita in Mexico is about half that of NZ, so yes it isn’t surprising that the poor are much worse off than those here.

      On emigration to the US, that biggest outflows ended when the last US construction boom ended. Estimates of the total illegal population in the US have been pretty static since then ,and a lot of those who still do get in illegally are from the still-poorer and more dangerous central American countries.

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    • Believing NZ stats is also a problem when International students, Foreign Workers for Christchurch, Kaikoura disaster rebuild, Intercity Rail, Construiction and returning New Zealanders as Permanent and Long Term Migrants.

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  5. Since you are interested in the topic, Michael, I will engage in some shameless self-promotion on the topic:

    http://www.tandfonline.com/doi/pdf/10.1080/00779954.2016.1219763

    Our hypothesis is that prior to the 1980s, the govt ran the public sector – including the state trading sector – as an employment program. This redistributed monopoly rents from the govt to workers, and pushed up wages in the private sector by making labour artificially scarce. Corporatisation (followed by privatisation) ended the employment program.

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