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Labour's share of growth in income and prosperity

Visiting researcher paper

This paper by Dean Parham was released on 26 September 2013.

The paper is about the sources of growth in income in Australia and the effects of structural change on the distribution of income between labour and capital. The main objective is to find an explanation for the fall in the labour share of income in Australia in the 2000s.

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  • Key points
  • Contents
  • The labour share of income fell by 4 or more percentage points in the 2000s.
  • However, labour was no worse off in the process.
    • Labour income grew at a faster rate in the 2000s than in the 1990s through stronger growth in both wages and employment.
  • The labour income share only fell because capital income growth accelerated even more.
  • The rise in the terms of trade meant that product prices rose faster than consumer prices. While labour received a smaller share of income at product prices, the slower growth in consumer prices meant that the real value of each dollar earned was worth more in terms of its purchasing power. This purchasing power effect (which was available to all income earners) more than outweighed the apparent reduction in labour's share of national income.
  • The large rise in Australia's terms of trade brought strong growth in real income — even stronger than the growth in the 'productivity decade' of the 1990s.
    • This provided scope for growth in both labour and capital income to rise.
  • Other high–income countries also experienced a decline in the labour income share, but driven by a different set of factors. In other countries, growth in labour income has suffered.
  • The mining boom was overwhelmingly responsible for the fall in labour share in Australia:
    • Development of mining and associated capacity added to the economy's capital stock, leading to more capital-intensive production overall.
    • Higher output prices for minerals (and construction) reduced the real cost of labour so that growth in real wages fell behind labour productivity growth.
  • The two other industries most affected by the mining boom — Construction and Manufacturing — served to increase the labour income share.
    • In Manufacturing, a slowdown in capital income growth meant the industry contributed more to labour income than to capital income at the aggregate level.
    • Construction had stronger growth in capital income than in labour income. However, because the industry is labour intensive, growth in Construction's labour income had a greater effect on aggregate labour income than growth in its capital income had on aggregate capital income.
  • As the terms of trade now decline, the labour income share will rise. But with a more capital-intensive economy, the share is unlikely to revert fully to previous levels.
  • Action to restore the old labour income share or to recover 'lost' income share through wage rises would probably only have adverse consequences for employment and inflation and for industries already facing adjustment pressures.
  • With the prospect of declining terms of trade, a focus on productivity growth will be the way to sustain growth in real wages.

Further information

Jenny Gordon (Principal Adviser Research) 02 6240 3296

  • Preliminaries
    • Cover, Copyright and publication detail, Contents, Visiting Researcher papers and Preface
  • Overview
  • Chapter 1 Introduction
    • 1.1 Focus of the paper
    • 1.2 Approach
    • 1.3 What the paper does
  • Chapter 2 Income and its sources
    • 2.1 Growth in output, income and prosperity
    • 2.2 Sources of growth
    • 2.3 Industry sources of income growth
    • 2.4 Key point summary
  • Chapter 3 The labour share: historical and international perspectives
    • 3.1 What is the labour income share?
    • 3.2 Trends in the labour income share
    • 3.3 An Australia–US comparison
    • 3.4 Key point summary
  • Chapter 4 The labour share: aggregate perspective
    • 4.1 The labour income share in the market sector
    • 4.2 Relative growth in capital and labour income
    • 4.3 Factor proportions and relative rewards
    • 4.4 Productivity and costs
    • 4.5 Key point summary
  • Chapter 5 The contribution of changes in industry structure
    • 5.1 Industry sources of factor income growth
    • 5.2 Changes in relative size and changes within industries
    • 5.3 Industry contributions to growth in factor incomes
    • 5.4 Assessment of the role of change in industry structure
    • 5.5 Key point summary
  • Chapter 6 Other industry contributions
    • 6.1 Factor proportions and reward ratios
    • 6.2 Real product wage and labour productivity
    • 6.3 Industry sources of product price inflation
    • 6.4 Key point summary
  • Chapter 7 Product and consumer prices
    • 7.1 A wedge between product and consumer prices
    • 7.2 A wedge between real consumption wages and real product wages
    • 7.3 Key point summary
  • Appendix A Methods for estimating industry contributions
  • References

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