Labour share of income

I’m out of town today so just a short post.

I’ve written various posts over the years looking at the labour share of income and how that has changed over time in New Zealand, and how what has gone on in New Zealand compares with other OECD countries (eg here).  My story –  just using the official data –  has been a relatively positive one, if labour shares actually tell one much (one can envisage an alternative set of outcomes in which productivity growth has been much faster, the labour share of national income was lower, but most people were still better off than in the actual underwhelming economy we’ve lived in).

We don’t have these data quarterly, so the annual national accounts release a few weeks ago gave us the once a year update.   Here is total (economywide) compensation of employees as a share of three measures of the size of the economy.

labour share 2019.png

(The indirect tax and production subsidies adjustment is because, say, raising GST raises nominal GDP/GNI/NNI, but doesn’t generate any more production/value in the economy to share around.)

The picture no longer seems quite so encouraging.  When I first did charts of this sort three years or so ago, I focused on the share of GDP.  There had been an increase in the labour share and things now seemed to be holding steady.  For example


But with subsequent revisions to the data to 2016, and the new provisional data for the more recent period there has been some slippage even in the labour share of (adjusted) GDP.    But GDP isn’t a good measure of effective income available to New Zealanders.   It includes depreciation, which is simply about maintaining the existing capital stock.  And includes the portion of the economy’s production that accrues to foreigners (mostly interest and profits).

It seems to me that the ratio of compensation of employees to net national income (NNI), adjusted for indirect taxes and production subsidies, is probably the most sensible whole-economy measure.  And on that measure there had been a pretty substantial increase in the labour share of New Zealanders’ net income in the 00s, but quite an unwinding again this decade.

I’ve previously shown charts illustrating that New Zealand wage rates appear to have been rising faster in New Zealand than nominal GDP per hour worked (the best quarterly proxy for the economy’s overall “ability to pay”). I argued that that was consistent with –  another way of expressing – the idea of a high, fundamentally overvalued, real exchange rate.   Since the quarterly GDP series is being substantially revised late next week, there is no point updating that chart right now.  But it will be interesting to have another look –  including at the annual version using, eg, the NNI data –  when the GDP data have been released.  Most likely, those data will show a bit more productivity growth in the last few years, but the “a bit more” is likely to pale in comparison with the extent of the productivity underperformance over decades.

Fix that –  which might involve the government, Opposition, and official agencies taking the problem seriously –  and most New Zealanders would be materially better off, whatever the aggregate labour share.