In the long run, growth in real wages is driven almost entirely driven by labour productivity growth. In the shorter term, factors such as relative bargaining power and economic shocks - such as large movements in the terms of trade - can lead to deviations in the relationship between real wages and productivity. Sometimes wage growth lags productivity growth, other times it can overshoot.

The extent to which productivity growth drives real wage growth is an area of current debate, with some analysis suggesting that the long run effect of productivity on real wage growth and productivity growth has weakened. A persistent long run gap in this relationship is generally referred to as wage decoupling.

Wage decoupling matters to policy-makers and individuals. Real wage growth allows households to purchase more or better goods and services and improves welfare and wellbeing. If the link between productivity and wage growth weakens, the attention of policymakers may shift away from productivity and towards other mechanisms to engineer real wage growth.

Key findings:

• Mining and agriculture – which account for about 5% of total people employed across the economy – have exhibited wage decoupling and skew the national average significantly.
• In all industries outside of mining and agriculture, which account for over 95% of employment, the difference between productivity growth and wages growth has been relatively low. Outside of mining and agriculture, more than half of the sectors examined experienced zero or negative decoupling. As a consequence, the share of income going to that 95% of labour has declined by less than 1 percentage point over the past 27 years.