Some labour market statistics that really should be looked into

There was a curious line in the Labour-New Zealand First agreement, under “Economy”.

Review the official measures for unemployment to ensure they accurately reflect the workforce of the 21st century.

I wasn’t (and still am not) clear what the two parties had in mind.  It got some people rather hot and bothered, with suggestions of political interference to get numbers that happened to suit the government of the day.  That interpretation seemed pretty far-fetched.  Plenty of people –  politicians included –  have views on what Statistics New Zealand should collect and report data on.  And governments have to decide what to fund Statistics New Zealand for –  regional nominal GDP data got added to the mix a while ago, there are now weird (and intrusive) things like the General Social Survey, and on the other hand we still don’t have monthly CPI data, monthly industrial production data (in both cases, unlike almost every other advanced country) or quarterly income-based measures of GDP.   Rather rashly, governments and SNZ appear on course to degrade our travel and immigration data.

So I don’t have a problem if parties to a government want to have a look again at some or other area of our official statistics, and perhaps even get Treasury and MBIE to commission some expert or other to have a fresh look at indicators of unemployment etc.  I’d be even more pleased if such a review led to the allocation of a bit more money to Statistics New Zealand.  But I’m not sure there is much of a problem with the HLFS as it is, even if my confidence in the data have taken a bit of a dip since my household has been in the survey (over the last few quarters).   Oh, and when they made changes to the HLFS last year, and made no attempt to backdate the new employment and hours series, simply leaving a level shift in the official series that was a bit trying too (one always has to remember to make a rough and ready adjustment for the break – I almost forgot to in the charts below).

Is it a bit odd and arbitrary that the headline measure of unemployment doesn’t count you as unemployed if you managed one hour’s paid work in the survey week, even if that was the only hour you managed to get all quarter and you’d really like a 40 hour a week job?    Absolutely it is.    But so long as the headline unemployment measures are used either for cross-country comparisons, or for comparisons within New Zealand over time, precisely where one draws that (inevitably) arbitrary line won’t matter very much.  Other countries also calculate headline unemployment rates that way, and we’ve been using the HLFS since 1986.

It is more of a problem when complacent commentators misuse the measure to go on about how “unemployment” is “only” 4.6 per cent, as if all is rosy.   Of course, even a 5 per cent “true” unemployment rate would mean that over a 40 year working life, the typical person would be unemployed –  on the quite narrow definition –  for two years.  That is a large chunk of time, and (like me) probably few of those commentators ever spent any time unemployed on this measure.

But SNZ does now do quite a reasonable job of providing a richer array of data that enables users –  and media and other commentators –  to get a fuller picture of overall supply/demand imbalances in the labour market.  We have data on the people in part-time work who would like to work more hours.  And data on people who would like a job but have become discouraged by repeated failure, and have given up searching (to the definitions of the HLFS).  Outside the HLFS we have data on those on welfare benefits.  Now there is even an official underutilisation rate, which can also be compared across time and (with more difficulty) across countries.   At 11.8 per cent that is a pretty high number, and probably one that –  were it more widely known –  would trouble many people (as it does me).   These numbers tend not to matter much to macroeconomic commentators, focused mostly on cyclical fluctuations, since the various different series tend to move together and a demand for long-term time series drives people quickly back to the headline measure.  But it doesn’t make the other measures less valuable or important for other purposes.

It is meaningless to say that “the” unemployment rate is 4.6 per cent, but that would have been as true in 1997 as it is 2017.  Then again, it probably isn’t meaningless to say that all the measures of excess labor supply are higher than they were 10 years ago, a period over which demographic trends have probably been working to lower the long-run sustainable rate of unemployment (on whichever measure you choose).

Statistics New Zealand don’t seem any better informed about the review

[Labour market manager] Ramsay said Statistics NZ had no more information about the review apart from what was in the coalition agreement.

“Nothing at this point. No content at all.”

But if there are resources to spend on reviewing and improving labour market statistics, I’d be making a bid for something around wages data.

A repeated theme from the Labour Party during the election campaign was that wage growth has been slow, and that this needed to change.  When the Labour Party leader was, at times, challenged about this claim, her response was that people didn’t “feel” better off.    Now, I’m sure perceptions matter a lot in politics, but ideally perceptions –  and the policies of governments – will be informed and shaped by the data, rather than the other way round.

In a post a few months ago I illustrated, using national accounts data, that the labour share of income has been trending up in New Zealand over the last 15 years or so.  COE

Over that period, on official data, New Zealand’s experience has been quite different from that of the other Anglo countries (and much of the commentary we read is British or American).  Across the OECD as a whole, the labour share in the median country hasn’t changed in the last 15 years, and New Zealand has had one of the larger increases. [UPDATE: An interesting illustration of how different the Australian experience has been.]

One of the problems in making sense of what is going on is that (a) we don’t have a quarterly income-based measure of GDP, so we fall back on the published wages data, and (b) the published wages data are all over the place.

Still most widely quoted is the very-volatile Quarterly Employment Survey measure of average hourly wage rates, a measure that (by construction) is subject to compositional changes  (if, this quarter, lots more low-skilled get jobs, even at good wage rates for those jobs, average hourly wage rates will fall even though no one is earning less per hour than they were).

Then there is the Labour Cost Index (LCI) which doesn’t purport to be a series of wage rates, but rather a proxy for unit labour costs. In other words, it is an attempt to measure wages adjusted for changes in productivity etc.  It is a smooth series, and is given prominence by SNZ, but it tells us nothing at all about the growth in the hourly earnings of the people who are in employment (adjusted for changes in composition).

And then there is the Analytical Unadjusted Index.  Even the name would deter most casual users.  It is found buried among the Labour Cost Index series, and  –  at least on paper –  looks like the best series we have.  It is constructed from the raw wages data SNZ collects to generate the headline LCI series, and is constructed in a stratifed way, to eliminate (or minimise) distortions arising from compositional changes.

This is what inflation in the Analytical Unadjusted series looks like

analytical unadj nov 17

It is relatively smooth –  conforming to economists’ priors about how labour markets work –  and, of course, (nominal) wage inflation is much lower it was a decade ago.  (Remember that the tick up in the most recent quarter is the impact of the pay-equity settlement.)    Of course, CPI inflation is also a lot lower than it was then.

A couple of months ago, I did a post using the Analytical Unadjusted data, deflating it by core inflation and comparing it with growth in real GDP per hour worked.  Real wage inflation appeared to have been running well ahead of productivity growth (the latter, non-existent, in aggregate, for the last five years).

But in that chart, I didn’t take account of the terms of trade.  A higher terms of trade – and New Zealand’s have done quite well in the last 15 years or so –  lifts the incomes the economy can afford to pay.  A better way to look at things might be to compare nominal wage growth with growth in nominal GDP per hour worked.  There is a lot of short-term variability in nominal GDP growth –  as dairy and oil prices ebb and flow  – but if we look at cumulative growth over fairly long periods we might hope to find something interesting.  Over very long periods of time we might expect hourly wage rates to increase at around the rate of growth in nominal GDP per hour worked.

The Analytical Unadjusted data go back to mid 1990s for the whole economy, and to the late 1990s for the private sector.   Here is what the resulting chart looks like.  Both series –  wage rates and nominal GDP per hour worked – are indexed to 100 when the Analytical Unadjusted data start.  (Recall that we still only have q2 GDP data).   I’m showing the ratio of the two series: when the line is rising, wage rates are rising faster than nominal GDP per hour worked.

wages and nomina GDP phw an unadj.png

For the first seven or eight years, the chart looks much as you’d expect.    There is quarter to quarter volatility in GDP, which is reflected in the ratio, but broadly wages were rising at around the rate of growth of  nominal GDP per hour worked.  Wages outstripped nominal GDP growth in the late boom years –  even as the terms of trade were rising –  and have done so again, in the last five years.   Over the last 15 years, private sector wage rates –  on this measure –  have risen perhaps 12 per cent faster than growth in the value of nominal GDP per hour worked.  (And the tax switch in 2010 will have boosted nominal GDP, without any reason to expect it would change pre-tax wage rates. so the “true” increases in wages relative to underlying GDP is even larger than the chart suggests).

I find this picture plausible, and I think I can tell a sensible story about what might have been going on.  But before I tell that story, here’s an alternative chart.    The QES wages data go back further, to 1989.  And here is what the chart of QES ordinary time wages rates looks like relative to growth in nominal GDP per hour worked back to 1989.

wages and nom GDP QES

It is on exactly the same scale as the previous chart.  But on this measure, private sector wages have barely kept pace with nominal GDP per hour worked growth over almost 30 years now (and have been losing ground since end of the 1990s), while public sector wage rates have outperformed (but almost all the out-performance was in the 1990s, under those spendthrifts, Ruth Richardson and Jenny Shipley.

I just don’t believe that the QES picture is portraying an accurate picture of what has been going on in the labour market.  For a start, it is inconsistent with the national accounts (the labour income share chart, which suggests that something turned in labour’s favour 15 years or so ago).  And the labour income share chart looks more consistent with the stratifed Analytical Unadjusted based measure.

To be clear, I’m not suggesting that labour has done particularly well.  The productivity performance of the New Zealand economy has been pretty lousy –  especially in the last five years –  and the unexpected (and outside our control) improvement in the terms of trade only offsets a bit of that gap.   Absolute levels of nominal GDP per hour worked in New Zealand remain very low by advanced country standards and, thus, so do wage rates.   But given the relatively poor performance of the economy as a whole, labour hasn’t done badly at all.  If people have feelings about these things it doesn’t look as though they should be about evil capitalists (or evil governments) rapaciously transferring money to themselves or their rich mates.  Simply that poorly performing economies –  with little or no productivity growth –  shouldn’t expect much wage inflation.  If there is rage, it should be about successive governments of both parties that have done nothing to redress that failure.

There might still be some serious problems with the statistics.  But if the Analytical Unadjusted series is roughly right (even if not many commentators cite it), how might one explain what it shows?  My explanation is pretty simple: the (real) exchange rate, which stepped up sharply about 15 years ago and has never sustainably come down since.    When the exchange rate is high, firms in the tradables sectors make less money than they otherwise would have done.   The usual counter to that is that the terms of trade have risen.  But the increase in the real exchange rate has been considerably more than the higher terms of trade would warrant, and in any case much of the gains in the terms of trade have come in the form of lower real import prices, rather than higher real export prices.

And why has the exchange rate been so high?  Because the economy has been strongly skewed towards the non-tradables sector which –  by definition –  does not face the test of international competition.  Demand for labour in that sector has been strong, on average, over the last 15 years, and it is the non-tradables sector that has, in effect, set the marginal price for labour.  For those firms, in aggregate, the lack of productivity growth doesn’t matter much –  they pass costs on to customers.  But it matters a lot for tradables sector producers, who have to pay the market price for labour, with no ability to pass those costs on (while the exchange rate puts downward pressure on their overall returns).  Another definition of the real exchange rate is the price of non-tradables relative to those of tradables. Consistent with this sort of story, in per capita terms real tradables sector GDP peaked back in 2004 (levels that is, not growth rates).

Perhaps it isn’t the correct story. Perhaps there is some serious problem with the data.  But if the government is serious about the words in the Speech from the Throne

A shift is required to create a more productive economy

one (small) step towards getting there might be set out to resolve the puzzles, and apparent inconsistencies, in our labour market (wages) data.  At present though, the best-constructed series suggests a badly-unbalanced economy.  Workers haven’t done badly given the poor performance of the overall economy, but the foundations haven’t been laid for durable real income growth –  if anything, they’ve been progressively whittled away as the foreign trade share of the economy has eroded.

 

 

 

 

On wages: expectations and reality

Last week, when I was tied up with other stuff, I heard a few media reports that a new Westpac survey was showing that public expectations of wage increases were slipping away.  At the time, I didn’t look at the details, but made a note to come back to it.

This was the key chart included in Westpac’s report of the survey results.

wage expectations

Introduced with this text:

Although workers may be feeling more confident about job opportunities, when it comes to the outlook for earnings, sentiment is really in the dumps. Increasing numbers of workers are telling us that they don’t expect any change in their earnings from work over the coming year. In fact, the number of workers who expect to receive a pay increase over the coming year is languishing at the sort of lows we saw during the financial crisis.

Concluding with this

And while nominal wage growth has remained muted, consumer price inflation has picked up. After lingering below 1% for much of the past few years, consumer price
inflation is now running at 1.7% per annum. This means that the limited pay rises many workers have received have only just been keeping pace with changes in the cost of living. And for those workers who didn’t receive a pay rise (and even for some that did), their spending power may be going backwards.

I’m not really convinced.

I’m not doubting that respondents did answer the question the way Westpac reports. I wouldn’t even be surprised if the recent reversal of wage expectations was the real thing: there was all sorts of talk not long away about wage inflation being just about to “take off”, which so far hasn’t come to anything much.   But even with the recent reversal, expectations are still just back to around where they were for a fair part of 2015 and 2016.

My concern is more about how to interpret the longer-run of data in the chart and, in fact, how to make sense of wage data themselves.

For a start, surely respondents to this survey are inclined to bias their answers downwards?  After all, look at the results for the 2005 to 2007 period, when the labour market was unquestionably tight (including the fact that the unemployment rate was below 4 per cent), and general wage inflation –  on any of the measures –  was quite high.  And yet only around 50 per cent of respondents expected a wage increase.  Many more than that must have been achieving a wage increase.  As I’ve noted previously, the labour share of total income has actually been increasing in New Zealand.

Second, it is worth remembering that inflation expectations now are materially lower than they were a decade ago.

household expecs 2017

The numbers bounce around a bit, but at the end of the previous boom the average year-ahead expectation was around 4.5 per cent, whereas now it around 3 per cent.  (One shouldn’t put much weight on the absolute numbers, but the pattern is consistent with others surveys of inflation expectations.)   If inflation expectations have fallen materially, surely it is reasonable that fewer survey respondents will now be expecting nominal wage increases, even if everything else (labour market tightness, productivity growth or whatever) was unchanged?

Westpac also uses as a reference point a 1.7 per cent rise in annual wages.  That number appears to come from the LCI, a series that purports to adjust for what firms’ report were productivity changes.  It is better to use the “analytical unadjusted” measure from the LCI, which is closer to a stratified raw measure of wage increases –  which is, after all, more like what the respondents in the Westpac survey are being asked about.

Many commentator also focus on the even lower wage inflation numbers from the Quarterly Employment Survey (QES) –  a wage measure that is notoriously volatile (and not really representative of how anyone thinks the labour market is actually working).  It is quite prone to compositional changes, and thus doesn’t reflect – or really try to reflect –  an individual’s own experience in the labour market.

I’ve covered this issue in an earlier post.

I’m not sure why people put so much weight on the QES measure of hourly wage inflation.  It has well-known problems (for these purposes) and is hugely volatile.   Here is a chart showing wage inflation for the private sector according to (a) the QES, and (b) the Labour Cost Index, analytical unadjusted series.

wages debate  No economic analyst thinks wage inflation is anything like as volatile as the blue line –  in fact, wage stickiness, and persistence in wage-setting patterns is one of the features of modern market economies.

And here is the chart I ran last week, comparing real private sector wage inflation (the orange line above, adjusted for the sectoral core measure of CPI inflation) with productivity growth.

Real wage inflation now is lower than it was in the pre-2008 boom years, but it is running well ahead of productivity growth (however one lags or transforms it).

As I noted in that earlier post, real wage inflation in New Zealand has been surprisingly strong in recent years, given the complete absence of any (actual or trend) growth in labour productivity (real GDP per hour worked).  Of course, low inflation and low inflation expectations hold down the nominal rates of wage increases (relative to what we were experiencing a decade ago), but the real measures are largely what matter.   Real household purchasing power from labour income in New Zealand has been increasing –  from increased employment, but also from real wage increases that are more than it is likely that the economy can support in the longer-term.

Perhaps then people are right to expect more modest wage increases ahead.  But if so, it will likely be because the non-tradables led pseudo-boom of the last few years comes to an end, and market processes across the economy force an adjustment in wage-setting to something more consistent with our alarmingly poor productivity growth record (in this particular bad phase now five years and counting).

 

Productivity, wages, and other debate thoughts

Like many, I watched the major party leaders’ debate last night.   It was civil and courteous, playing the issues rather than the person.  So far, so good.  But sadly neither leader seemed to offer anything very substantial on fixing our pressing economic challenges, or even show any real sign of understanding the issues.     At a time when the unemployment is still well above what it was a decade ago, when the underutilisation rate for women is still almost 15 per cent…..

underutilisation

…when there has been no productivity growth for five years, and when the export share of GDP has been shrinking, the Leader of the Opposition seemed content to concede that the economy was in good shape.  “Relentlessly positive”  I suppose.

Not that the Prime Minister was having a bar of any concerns about productivity.   As Newsroom put it

English dismissed outright a report from sharebroker J B Were which concluded the country had a productivity recession. They were wrong. “They are way over-stating the case. Productivity in New Zealand has been growing pretty well….

Well, you can read the J B Were piece for yourself.  I did when it came out, and did again this morning.   It made many of the points I’ve been making here for some time.    There isn’t anything in the economic side of the report I’d materially disagree with.  The data –  as officially reported by Statistics New Zealand –  speak for themselves on the productivity underperformance, particularly over the last five years.

I’ve run this chart numerous times before.

real GDP phw july 17 Not only have we had no labour productivity growth for five years, but our near-neighbour Australia –  which the government was once willing to talk about catching up to – has gone on generating continuing labour productivity gains.    Yes, there has been a productivity growth slowdown in much of the advanced world, dating back to around 2005.    But our additional and more recent slowdown –  well, dead stop really – looks like something different, and probably directly attributable to New Zealand specific factors.   Things New Zealand governments have responsibility for responding to.

I’ve also shown this chart before –  labour productivity for the better-measured parts of the economy, with SNZ’s attempt to adjust for changing labour quality. It is annual data, and only available with a bit of lag.

market sector LP

Again, no labour productivity growth at all in the last few years.

And what about multi-factor productivity growth?  It doesn’t get as much attention, partly because the data are only annual, and the construction of these estimates involves quite a few assumptions.   Nonetheless, here is the SNZ estimate for the (better) measured bulk of the economy.

mfp to 2016

The series is cyclical –  if machines are idle in a recesson estimated MFP falls and then recovers as utilisation picks up –  but looking through the recession, the estimated index level of MFP is the same now as it was 10 years previously.  No growth.

But somehow the Prime Minister thinks “productivity in New Zealand has been growing pretty well”.    One for the Tui billboards I’d have thought.

And all that is without even getting into the lamentable failure of governments led by both main parties to do anything about reversing the precipitous decline in levels of productivity in New Zealand relative to those in other advanced economies.    Lifts in the terms of trade –  experienced under both this government and its predecessor –  are of course welcome, but they can’t be a credible medium-term substitute for productivity growth.

From the other side, the Leader of the Opposition’s suggestion that data on real wage growth didn’t matter, and what really mattered was how people felt, seemed almost equally risible.  In terms of attracting votes, perhaps she is right.   But when the Prime Minister pointed out that real wages have been rising, he was of course correct.  I’m not sure why people put so much weight on the QES measure of hourly wage inflation.  It has well-known problems (for these purposes) and is hugely volatile.   Here is a chart showing wage inflation for the private sector according to (a) the QES, and (b) the Labour Cost Index, analytical unadjusted series.

wages debate  No economic analyst thinks wage inflation is anything like as volatile as the blue line –  in fact, wage stickiness, and persistence in wage-setting patterns is one of the features of modern market economies.

And here is the chart I ran last week, comparing real private sector wage inflation (the orange line above, adjusted for the sectoral core measure of CPI inflation) with productivity growth.

Real wage inflation now is lower than it was in the pre-2008 boom years, but it is running well ahead of productivity growth (however one lags or transforms it).    From here, lifting productivity growth is the only way real wage inflation is going to increase, and such increases in economywide productivity really should be recognised for what they are –  a well overdue imperative.

Sadly, the Prime Minister seems to want to bluff his way through, simply pretending there isn’t an issue, with no real answers as to how to  (for example) lift the outward-orientation (exports and imports) of the New Zealand economy, and refusing to face the fact that productivity growth has vanished since the latest new large net migration inflow began in 2013.  It won’t be the only reason why productivity growth has been vanished, but it is unlikely that there is no connection at all (and certainly the much-vaunted official and political claims that high non-citizen immigration flows are helping lift productivity look emptier than ever).

And the Opposition leader is no better.    When Ardern was asked last night who was going to build the houses if immigration was cut back, my 14 year old son turned to me and asked “why doesn’t she just say that if there are fewer migrants fewer houses would need to be built”.   Sadly, I could only point out that Labour’s approach to immigration actually isn’t materially different to the National Party’s.  The net inflow might be a lower in the first year, but in the essentials they are two sides of the same coin.  Here is what I wrote when Labour released their policy in June.

Overall, some interesting steps, some of which are genuinely in the right direction.  But, like the government, Labour is still in the thrall of the “big New Zealand” mentality, and its immigration policy –  like the government’s – remain this generation’s version of Think Big.  And it is just as damaging.    The policy doesn’t face up to the symptoms of our longer-term economic underperformance –  the feeble productivity growth, the persistently high real interest and exchange rates, the failure to see market-led exports growing as a share of GDP, and the constraints of extreme distance.  None of those suggest it makes any sense to keep running one here of the large non-citizen immigration programmes anywhere in the world, pulling in lots of new people year after year, even as decade after decade we drift slowly further behind other advanced countries, and se the opportunities for our own very able people deteriorate.

And what is Labour’s solution to the economic challenges?   There is lots of talk about more skills training, even though the OECD surveys suggest that our people are already among the most skilled in any OECD country.       Beyond that, Jacinda Ardern was invoking the OECD –  “they’ve told us what we need to do” to lift productivity and economic performance.

Well, this table is from the latest OECD Economic Survey of New Zealand, released a few months ago.  On the left hand side are the “main findings” and on the right the “key recommendations”

OECD recs

I don’t wildly disagree with most of those recommendations –  sceptical as I am of R&D subsidies.     But (a) with the exception of R&D subsidies, does this look at all like Labour Party economic policy  (has there been talk of the tax working group possibly proposing lower capital taxes?), and (b) more importantly, does anyone really think that these items, even taken together, are remotely enough to materially reverse the decades long decline in our relative productivity performance, that the OECD themselves highlighted?

Sadly, there was all too much of “let’s pretend” to the debate, and nothing to suggest that either side is really serious about engaging with, and delivering solutions to, the decades of underperformance, presenting now in five years of no productivity growth at all, and an economy increasingly skewed inwards rather than outwards.

 

 

 

 

 

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).

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.”

and

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.

COE

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.