The wage price index rose 2.3 per cent through 2018. After subtracting the inflation rate of 1.8 per cent, real wages grew a modest 0.5 per cent, below recent growth in productivity. Weakness in both nominal and real wages growth is widely considered a puzzle, not least in official policymaking circles.
Reserve Bank governor Philip Lowe has gone so far as to call it a "crisis".
Craig Emerson wrote in these pages on Tuesday that "workers continue to struggle on flat wages" - and warned of a rising political cost.
Other commentators have questioned whether Australia's labour market institutions are really effectively in translating productivity growth into growth in real wages. Some have even called for a return to national wages policy or centralised wage fixing.
The weakness in wages growth has been broad-based across different industries, different states and territories, job levels, and in both the public and private sectors. Measures of dispersion in wages growth have been declining. Not coincidentally, the dispersion of labour productivity growth across industries has also decreased.
Australia is not alone in experiencing subdued wages growth in recent years. There has been a long-running debate in the United States about the relationship between wages and productivity growth that pre-dates the 2008 financial crisis and is linked to debates over income inequality that have informed populist politics on both the left and the right.
20 March 2019
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US research points to a number of considerations that have been missing from the Australian debate and which offer explanations for the local wages "puzzle".
The first concerns the relevant definition of wages for productivity. In the US, the focus has been on total compensation rather than wages, recognising the growing importance of non-wage benefits.
In Australia, this means focusing on national accounts measures of employee compensation that include superannuation benefits rather than narrower measures such as the wage price index.
US research also highlights the importance of inflation adjustment. Adjusting wages for consumer price inflation is relevant when measuring consumer purchasing power. But workers are compensated on the basis of what they produce, not what they consume. When comparing real compensation and productivity, the output deflator is the more relevant measure to adjust for inflation.
The US data also shows the importance of lags in the compensation-productivity relationship. US economists Martin Feldstein and Larry Summers separately find that allowing for lags of up to two years strengthens the statistical association between compensation and productivity.
When these considerations are taken into account, the supposed disconnect between workers' compensation and productivity largely disappears, both in the US and Australia.
Another way of looking at the relationship between worker compensation and productivity is through the labour share of income.
If employee compensation is not keeping pace with productivity, then the labour share of income should fall and the capital share should rise, all else being equal.
Compared to earlier decades, the labour share of income has declined in both the US and Australia.
This has been widely interpreted as a decline in workers' bargaining power and symptomatic of income inequality.
But this interpretation does not stand up to scrutiny. Because capital income is more volatile than labour income, overall income typically declines by more than labour income during recessions, so that the labour share of income rises. In other words, the labour share is counter- rather than pro-cyclical.
In Australia, the labour share of income is negatively correlated with the labour under-utilisation rate. The labour share rises when workers' bargaining power is at its weakest given the increased slack in the labour market. Real wages in Australia are also counter-cyclical.
The decline in the labour share relative to earlier decades has another explanation. US economist Matt Rognlie shows that the associated increase in the capital share in the US and other G7 economies is entirely explained by housing.
Australia has seen a similar trend to the US, with housing's share of total factor income rising from 2.4 per cent in 1960 to 8.2 per cent most recently. Housing accounts for about 40 per cent of the increase in the capital share in Australia since 1960.
This reflects the increased scarcity of housing as new residential land and dwelling construction is limited by a growing burden of regulation even as the demand for housing increases.
Although the dwelling stock is largely owned by households, this is small comfort to those locked out of home ownership by high house prices.
The lesson from both the US and Australian experience is that those concerned about the labour share of income and its implications for income inequality should turn their attention to the supply of housing rather than workers' bargaining power.
Raising productivity is still the best way to boost workers' wages. A return to centralised wage fixing would almost certainly lower productivity and break the productivity-compensation nexus, as it did in previous decades.