What about the workers’ share?
For decades, wage and salary earners have been getting a smaller bite of the pie
For decades now, workers’ share of the national income pie has been shrinking while the share going to the owners of capital has been growing, though more slowly in recent years, recent research by the Productivity Commission has found.
Another way of putting it is that real wages have been growing more slowly than labour productivity — and that is pretty slow.
Even so, the commission found that real wage growth is correlated with productivity growth, both over time and across industries.
It has updated some work it did in 2015, this time covering a wider range of industries so it now captures the 80 per cent or so of the economy for which the statisticians provide productivity data. The main omissions are public administration, health and education.
And there are another six years’ data, but the story remains the same.
Between 1978 and 2016, the share of national income going to the suppliers of labour fell 8.3 percentage points, but the bulk of the decline was in the first half of that period. Between 1996 and 2016, the labour income share fell 1.8 percentage points to around 55 per cent. The capital income share rose correspondingly.
It is a global phenomenon. The OECD reckons the average labour income share across the G20 economies declined by about 0.3 percentage points a year between 1980 and the late 2000s.
This has naturally led to much scratching of heads and stroking of chins as economists try to figure out what is driving this trend. Consensus remains elusive, but the three main suspects are:
Technological change and capital deepening. As workers get more and better kit to work with, their productivity rises, but the suppliers of that capital plant need a return on their investment.
Globalisation. Cross-border competition for work from countries with lower labour costs puts downward pressure on wages, especially for the less skilled.
Public policy, especially regarding the labour market. For most of this period, the dominant economic doctrine has been that governments should cut taxes, deregulate, privatise, open borders and stand back and let markets work their magic. Workers’ bargaining rights have been one casualty.
Which is it? The right answer is probably (d), all of the above.
On the technology story, the aggregate productivity statistics released by Statistics NZ in February show that between 2008 and 2017, labour productivity grew by 1.1 per cent a year on average, down from 1.3 per cent between 2000 and 2008 and 2.9 per cent between 1997 and 2000. The contribution from capital deepening also declined.
“We argue that the labour income share hasn’t fallen that much over the last couple of decades and in conjunction with low productivity, by international standards, you can conclude that New Zealand firms haven’t embraced technology and made the most of globalisation to the same extent as firms in other countries,” said the commission’s director of research, Paul Conway.
“But hopefully it is coming. The fact that we haven’t been slapped by it so far gives us a grace period. We need to use that to prepare so that the benefits are widely distributed across the people, and places, that make up New Zealand.”
Conway is optimistic about the ability of technology to at least mitigate the limitations of being small and remote.
“Trading knowledge-intensive products down fibre-optic cables is pretty interesting for small, remote firms in the South Pacific. I don’t think any of it is easy, but it is an option.” But the ability to seize that opportunity on the scale required will depend on the education system doing a better job of providing people with the skills they need in the 21st Century.
Council of Trade Unions economist Bill Rosenberg argues that the biggest driver of the declining share of national income going to workers has been government decisions.
Two periods when the labour income share lurched lower were the early 1980s — when Muldoon’s wage and price freeze was more of a freeze on wages than prices — and the early 1990s, when the disruptive effects of Rogernomics were reinforced by 1991’s Employment Contracts Act and the loss of workers’ bargaining power.
As Rosenberg crunches the numbers (for the whole economy, not just the measured sector the commission has examined) the cumulative effects are stark: “If wage and salary earners received the same share of the [national] income generated in 2017 as they did in 1981 they would on average have been $11,500 better off,” he said.
“In the smaller sector of the economy that the Productivity Commission looked at workers, including self-employed people, would on average have been $8400 better off.”
There is pretty clear international evidence of an inverse or seesaw relationship between the labour income share and income inequality.
That’s not surprising given how concentrated the ownership of capital is.
How much that inequality in gross incomes flows through to net incomes depends, of course, on the tax and transfer system.
New Zealand’s tax system relies heavily on taxing labour income, first when earned and then when spent.
At the same time, there is pressure to cut the company tax rate. At 28 per cent it is higher than the OECD average of 25 per cent.
But because of imputation credits designed to minimise the double taxation of dividends, officials say the tax rate for domestic shareholders is the sixth lowest in the OECD.
For foreign investors, however, it is the company tax rate that matters, and given New Zealand households’ lousy saving rates and the consequent need to attract foreign investment, the international trend towards lower company rates cannot be indefinitely ignored.
We have a tax system in which, year to date, PAYE and GST between them have yielded nearly five times as much revenue as company tax.
But the labour share of national income is shrinking and is liable to shrink faster if we ever get our act together on productivity.
Combine that with abject reliance on importing the savings of foreigners in a world of declining company tax rates and an intractable problem with base erosion and profit shifting, and we are left with a tax base that resembles an iceberg drifting north.
If wage and salary earners received the same share of the [national] income generated in 2017 as they did in 1981 they would on average have been $11,500 better off. CTU economist Bill Rosenberg