For the last few years – probably almost since the economy began emerging from the long recession of 2008 to 2010 – there has been talk about how low average wage increases have been. Those lines have sometimes been run in discussions of the general rate of inflation – all else equal, if inflation had been nearer target, average nominal wage increases probably would have been a bit higher – but more often it seems to have been a real phenomenon people had in mind; some sense of wage earners being “left behind”.
I’ve been increasingly sceptical of that story, and did a few posts 12-18 months ago to illustrate the point. Some of the data aren’t updated very often, and there are historical data revisions, so I thought it might be time to take another look.
The first series I’ve been interested in is the labour share of GDP – as approximated by the share of all the value-added in the economy accruing as compensation of employees. To make this comparison, one needs to adjust out for taxes and subsidies on production (all else equal, a shift from income taxes to a higher GST won’t raise wages – or leave people worse off on average – but will raise measured GDP). The data are only available annually, and only up to the March 2018 year, but here is the resulting chart.
There is a little bit of short-term variability in the series, but if (say) one compares the latest observation (year to March 2018) with the last observation before the recession (year to March 2008), the labour share of GDP is still a touch higher now than it was then. In both cases, it was higher than it had been at any time in the previous fifteen years or so. As I’ve noted previously, the trough was in the year to March 2002 (on my telling, this was not unrelated to the fact that the real exchange rate had then been around historic lows).
The other comparison I find interesting is to look at how wage rates have evolved relative to (nominal) GDP per hour worked. Nominal GDP captures both any productivity gains the economy has managed and any terms of trade gains (as well as general inflation). Over the longer-term one would expect those variables to be the biggest influence on developments in economywide wages.
In putting together this chart, I’ve used the SNZ analytical unadjusted series of the Labour Cost Index, which purports to be the right measure for these purposes (wage rates, rather than just average wages – the latter distorted by composition changes, and wages before any adjustments for productivity – the headline LCI series attempts to adjust for productivity gains). The series doesn’t get wide coverage but – absent any serious efforts to suggest the data are of unusually poor quality – should.
Unfortunately, the analytical unadjusted LCI series is only available back to 1995 (the private sector sub-component only to 1998) but even that is now well over 20 years of data.
In the chart I have:
- indexed nominal (seasonally adjusted) GDP per hour worked (using the HLFS and QES), and
- indexed the analytical unadjusted LCI series,
both to 100 in the March quarter of 1995, and then taken the ratio of the wage series to the GDP per hour worked series (so that the resulting series is equal to 1 in the March quarter of 1995).
There is a fair bit of short-term noise, but the trend is pretty clear. On this data, wages have been rising faster than the overall earnings capacity of the economy. That was so in the 00s, and has been so – albeit to a lesser extent – in recent years too. For anyone inclined to want to debunk the analytical unadjusted series, note that this chart is not wildly inconsistent with the labour share chart I showed earlier: the labour share of total income has increased since the early 00s, with the biggest change occurring in the pre-recession 00s themselves.
So what is the problem? There are two. First, general economywide inflation has been unexpectedly low this decade, and below the target midpoint now for years. Not surprisingly, against that backdrop nominal wage inflation has been lower than it might otherwise have been.
But the second – and far bigger – issue is that lack of productivity growth. Here is my regular chart, last updated just before Christmas
There has been no labour productivity growth for the last four years, and very little this decade. Sure, the terms of trade have been reasonably good, but you cannot expect strong sustained growth in (real) wages if productivity growth is so moribund. If anything, real wage growth has been surprisingly – and probably unsustainably – strong given that feeble growth in the earnings capacity of the economy. It is all consistent with a story of a high and overvalued real exchange rate – domestic demand pressures give rise to wage inflation, but in the process squeeze the outward-facing sectors of our economy. You’ll recall that exports (and imports) peaked as a share of GDP at about the turn of the century, and are no higher now than they were 40 years ago – even though successful small economies typically see a growing reliance on two-way international trade.
It would be good if our political “leaders” – and their advisers in The Treasury – actually focused on these sorts of imbalances and underperformances. But nothing serious is heard any longer from the Prime Minister about the productivity underperformance. Taking it seriously might confront them with hard choices, and I guess vapid rhetoric about “wellbeing Budgets” comes more readily. New Zealanders – including New Zealand wage earners – deserve much better.