Subdued wages growth has been a feature of the Australian and US economies in recent years, posting the slowest growth on record on some measures. This has led some to question whether workers are sharing in the benefits of increased productivity and greater economic prosperity.
The United States has seen a long-running debate over the supposed ‘decoupling’ of wages from productivity and its implications for the labour share of income and income inequality. There is an extensive US literature on ‘decoupling,’ with evidence presented both for and against this phenomenon.
It is important to distinguish between the earnings of the average and the median (sometimes called ‘typical’) worker. Economy-wide productivity growth is mostly expected to raise average rather than median earnings.
The literature supporting the ‘decoupling’ thesis based on median earnings confuses the productivity-compensation nexus with distributional issues. This confusion can lead policymakers to neglect policies focused on productivity growth and focus too much on redistribution.
This report finds the link between productivity and compensation in Australia remains robust under existing institutional arrangements, although this does not preclude the possibility of further reforms that could boost productivity, worker compensation and improve the distribution of productivity gains.
The long-run increase in the capital share in the United States, other G7 economies and Australia is largely driven by the housing component of the capital share. This in turn reflects the increased scarcity of housing driven by excessive regulation of land use and dwelling construction. Policymakers concerned about income inequality should focus on improving housing supply rather than workers’ bargaining power.
This report also shows that the cyclical variation in the labour share is a consequence of the relatively greater volatility of the capital share and not changes in workers’ bargaining power.
Monetary policy can also play a role in improving nominal wages growth by returning inflation to the central tendency of the Reserve Bank’s inflation target.