New research by KPMG Economics confirms wages growth in Australia continues to be determined by labour productivity, technology and the mix of capital and labour, with notable differences between industries.
The study, Wages, Productivity and Technology, looks at both a longer term period (from 1995 to 2018) and the most recent past (2013 to 2018), and is based on industry data.
The report confirms that wages, from the perspective of employees, have remained stagnant since 2013 – aggregate nominal wages (ie not taking into account inflation) have grown by just 1.8 percent per annum, less than half the average annual growth recorded in the previous 18 years.
But KPMG’s analysis shows the lack of growth in wages has not been because capital has been earning excessive returns, but rather that workers have broadly received wages growth at an industry level commensurate with the economic factors that determine returns to labour.
In the study, KPMG considered real wage growth from the perspective of the employer via the behaviour of real producer wage (RPW), which reflects the real cost to producers of hiring workers, and from the perspective of the employee, via the behaviour of the real consumer wage (RCW), which reflects the workers’ purchasing power.
The aggregate measure of Australian RPW grew, on average, by about 0.9 percent per annum from 1995-2018. Notably, between 2001 and 2013 RCW grew more rapidly that than RPW; and following that, the report found there is an inflection point in RCW around 2013 after which there is no growth in consumer wages.
The report also shows that a prominent factor in this rapid growth in real wages in Australia from 2001-2013 was the improvements in our terms of trade. By contrast, over the past 5 years wages growth has been more reliant on domestic factors.
Dr Brendan Rynne, KPMG Australia Chief Economist said: “Our report shows the growing influence of hi-tech capital as a determining factor in improving productivity and wage growth. This goes wider than just lT, and includes intellectual property, R&D, software, computers and electronic equipment. If an industry is slow in investing in technology, wage growth in that sector will be anaemic.”
The industries which recorded the lowest net increase in their real technology capital stock between 1995 and 2018 are the same industries that recorded low growth in the real producer wage over the same time period. Financial, professional, scientific and technical services and manufacturing have seen higher wage growth while, while the lowest were accommodation and food services and administration services.
Dr Rynne said; “We have found that variability in labour productivity across industries in Australia over the past two decades has been significant. Our analysis disproves arguments that labour productivity in Australia has recently been non-existent, or materially below our long-run average. It may seem so at an aggregate level, but once data is considered at industry level, such broad statements do not hold true across all sectors.
“Econometric analysis shows labour productivity is the key factor in driving growth in real producer wages in Australia. Slightly more than half of the change in our measure of the real producer wage comes from changes in our measure of labour productivity, while nearly 40 percent is due to industries’ propensity to employ more high-tech capital – and relatively more capital compared to labour – in their production processes.
“While we have shown the wage determination relationship still holds in Australia in both the short and long-term, our analysis does identify evidence during the period 2013 to 2018 of a change in how productivity, the capital stock mix and technology – either collectively or individually – have impacted the real producer wage. The growth in the capital-labour ratio across industries has been in a narrower range in the past 5 years, and those industries which are skewing their capital mix in favour of hi-tech capital may be in a better position to sustain wage growth in excess of output prices.”
Another key finding of the study is that there is an inverse relationship between the rate of growth of the RPW and the rate of growth in employment. This finding means attempting to force wage growth beyond what can be supported by productivity growth and the other factors may benefit those with a job but is likely to result in less jobs being available.
KPMG argues that if government is looking to ensure that Australians enjoy real wages growth then it should be pursuing policy settings that promote productivity growth, investment in capital and labour, and proportionally more investment in hi-tech capital.
Dr Rynne concluded: “Adopting policies that force wages growth without any underlying basis for that to occur – except the desire for an increase in income – is likely to result in businesses hiring fewer workers than otherwise would be the case”.
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