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Labour losing ground ?

May 29th, 2008

Don Harding of La Trone University has been digging into the Budget Papers and he’s found something startling – Projections of a sharp decline in the labour share of national income. As he says, this seems implausible on the face of it, but if the projections are right it’s a much bigger deal than food or petrol prices.

Update I’ve add Don’s supporting calculations in Word and Excel formats

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  1. davidp
    May 29th, 2008 at 18:55 | #1

    Don Harding is now a Professor of Economics at La Trobe University (only very recently)

    D’oh! Fixed now. Thanks for the alert, it’s great having well-informed readers. See you next week by videoconference! – JQ

  2. observa
    May 29th, 2008 at 21:38 | #2

    With the inflation genie well and truly out of the bottle now, it’s not only the share of the economic pie labour has to worry about
    http://www.news.com.au/adelaidenow/story/0,22606,23777375-5005962,00.html
    My guess is we’re headed straight back to the stagflation of the 70s again.

  3. davidp
    May 29th, 2008 at 22:05 | #3

    Hi John,

    I am sorry I won’t be at La Trobe next week – as am on OSP – it is a very interesting article by Don Harding though (which I wouldn’t have seen otherwise) – there will be quite a few new faces at La Trobe though for your videoconference!

  4. Jill Rush
    May 29th, 2008 at 22:30 | #4

    The petrol pricing debate is evidence of the incoherence of the Labor and Liberal narratives.

    Don Harding is to be congratulated for looking at the totality of the picture rather than the pieces.

    The Labor government is enjoying a great deal of goodwill. They are however struggling as to how to turn the ship of state in a new direction. The Labour movement is demanding that the reprehensible Workchoices laws are legislated into history. How much of the modelling in the Budget papers is predicated on the ongoing effect of those laws which left Labour without power to bargain effectively to maintain their share of the national income?

  5. BilB
    May 30th, 2008 at 05:57 | #5

    How can anyone possibly be surprised at this, or even not suspect it. That is the purpose of conservative government.

    It is time to develop an understanding of the notion of apparent wealth. People appear to have more goods, and in many ways the do, but the increase in goods function is not proportional to the loss of substance. For instance your apparently large house, 15% more volume, has been achieved by thinning down all of the materials from which it is made. The roofing gutters and barge boards used to be made from 1.2mm steel, now .45mm steel; the framing timbers used to be 100mm by 52mm hardwood are now 85mm by 35mm soft fast growing pine. All of the plastics in the fittings are now 30% thinner than they were say 15 years ago. And this ripples through every part of our lives. When there is a cost saving, what share of that saving does the end user get? Disguising this immense loss of substance is the proliferation of electronic functionality. Moore’s law has not only been applied to computers. Do a weight comparison the next time that you are at Hervey Norman. Pick up any stereo unit and feel the weight, then look at the functions on offer, store that thought. Then the next time that you are in you storage place pick up the old stereo that you have not quite decided to part with yet, look at its functions and do the comparison. Less substance more function. You the user feel that you got the better deal and from a function point of view you have, but the guy who pocketed the savings from your loss of substance was the corporate merchant (generally).

  6. Ian Gould
    May 30th, 2008 at 10:56 | #6

    Where has the growth in the economy in recent years been coming from – in large measure from mining, which tends to be capital-intensive and use relatively little labor.

    The record commodity prices have also delivered large windfall profits directly to the companies and their shareholders. When the price of coal doubles, coal miner’s wages don’t.

    Question: what’s been happening to real household incomes and to disposable income after housing costs?

    I suspect that that question is of more importance to most Australians than how much of their windfall the miners share with their employees.

    (And let’s not forget that it’s the taxes on those mining profits that are helping to fuel the budget surplus.)

  7. Bobalot
    May 30th, 2008 at 12:43 | #7

    It makes you wonder what big business is still complaining about.

  8. May 30th, 2008 at 14:07 | #8

    Immigration as a means to control ‘wages inflation’?

    It strikes me as odd that the dramatic increase in immigration to 300,000 announced by the Immigration Minister Chris Evans a fortnight ago has not been discussed anywhere on this site as far as I can tell. The only justification proffered by the Murdoch newsmedia which is pushing the immigration barrow for all that it is worth is to control ‘wages inflation’ which it maintains is so much more of a problem than other forms of inflation which are added to by immigration – housing, water, food, council rates, road costs, particularly tolls.

    In case anyone is interested, there is a discussion on immigration at larvatusprodeo.net. Also there’s material at candobetter.org/immigration. I would be most interested can show me why I am wrong in opposing high immigration, either here or on those sites.

  9. El Mono
    May 30th, 2008 at 14:55 | #9

    If the real income does decline i nthe coming years i pray that people do not turn to blaming immigrants.

  10. Smiley
    May 30th, 2008 at 16:58 | #10

    Second, the projections that labour costs will fall, employment growth will slow and unemployment rise are inconsistent with the policy to dramatically increase immigration.

    What really irks me is the twisted logic that our politicians seem to think they can get away with. On the one hand wages for the common working folk should be kept in check, but at the same time it is perfectly acceptable for housing costs to shoot to the moon and real estate agents reap the benefits. No, I think we really need a new class of politician.

  11. derrida derider
    May 30th, 2008 at 17:10 | #11

    David Gruen at the Treasury – the person most responsible for these figures – claims Don has misread things, and the Budget implies only a small drop in the labour share of national income (about 1 percentage point rather than the 5 percentage points that Don calculated). See here.

    Mind you, given that the wages share of GDP is already at record lows and that GDP growth is forecast to be modest, then even on David’s accounting the outlook for wages and/or employment is not good.

  12. Don Harding
    May 30th, 2008 at 23:11 | #12

    I make the following points in response to David Gruen in the Australian.

    1. The figures published in the Australian are based on an approximation that was in an earlier draft. Prior to publication I provided the Australian with an updated set of exact figures but for some reason they chose to run with the approximations.

    2. The approximations make some difference. For example, on the exact calculations Treasury’s forecasts imply that the wages share of GDP will fall from 47.9 in 2006-07 to 45.9 in 2008-09. Incidently David is wrong to say it falls to 46.9 only (I assume its a typo).

    3. David says “there is no plunge in the wages” share. Well, on the exact data, the wages share fell just 1.5 percentage points over the eleven years from 1995-96 to 2006-07. And is projected to fall 2.0 percentage points in the two years to 2008-09. I would call that a plunge. Plot it on a graph and it looks like a plunge.

    4. David calls the wages share “esoteric”. That must be news to a lot of workers. Its also something that has been important in Australian macroeconomics for some time.

    5. A wages share of 45.9 per cent of GDP is lower than any time on record. So it is of some interest.

    6. In the spreadsheet I also calculated the wages share in factor income. Nothing of significance changes.

    By the way I sent John Qiggin a spreasheet and a document setting out the calculations. John, I would be happy if you could post a link to them as they contain several useful graphs as well as the calculations.

  13. Stephen L
    May 30th, 2008 at 23:49 | #13

    Could someone clarify something for me? Does income to independent contractors count ever count as labour?

    In one of my jobs I am a casual employee in all meaningful respects. However, my boss prefers to pay me as an independent contractor (it makes the paperwork simpler, as well as saving him super and probably workcover). I’m not really in a position to object.

    This is anecdotally a common trend, and I’m sure there is research into its extent. If I and everyone else in this position are not having our income classed as part of the labour share of national income then the decline might be really a case of reclassification.

  14. Ian Gould
    May 31st, 2008 at 02:05 | #14

    Don, can you shed any light on my earlier question?

    Do these figures imply an actual decline in average wages or simply imply wages are growing more slowly than profits?

  15. cb
    May 31st, 2008 at 16:29 | #15

    Stephen L: If you are an independent contractor, you are counted as an unincorporated enterprise from a national accounting perspective. Most researchers in this field know to split this income up between wages (reallocated to the wage share) and notional profits (allocated to the profit share). Looking at the spreadsheet John Q has made available here, I see that Professor Harding has not done this. I don’t know how much difference it makes, but it’s a conceptual error on his part not to do this.

    In response to Ian Gould: the latter. It just means that wages are growing more slowly than profits.

  16. Ian Gould
    May 31st, 2008 at 18:31 | #16

    CB, well that’s still a bit of a worry but not as bad as people actually going backwards.

  17. rog
    May 31st, 2008 at 22:29 | #17

    Stephen L, both you and your employer are open to claims of breach of various OHS, industrial and tax laws. If you are legit at a minimum you should be carrying your own public liability and income protection insurance plus an ABN.

    If there is an accident at work life could get complicated.

    For definitions of independent contractor try http://www.abcc.gov.au/abcc/FactSheets/AmIanIndependentContractor.htm

  18. Don Harding
    May 31st, 2008 at 23:02 | #18

    Some responses to questions:

    1. CB. I understand about independent contractors. But in the budget statements there are no forecasts of contractors incomes or the growth in number of independent contractors – I have used all of the information Treasury made available in the Budget. Thats why I focused on the broadest measures of wages share. It’s way over the top for CB to call this a “conceptual error” it falls into the category of necessary approximation. In any case I don’t believe that treasury’s projected sharp slowdown in employment growth arises because they think there will suddenly be a huge growth in independent contractors. If they do think that they should say so in the budget papers. Finally, I have provided my spreadsheets if there are errors people can point them out and show how to fix them.

    2 Ian Gould. The projected plunge in the wages share in this case is more than just a case of wages growing slower than profits. The Treasury projections have the following implications.
    a) The real wage to business (ratio wage to GDP price deflator) falls substantially;
    b) Unit labour costs (ratio of real wage to labour productivity) fall even faster.
    c) The real consumption wage (ratio of wages to consumer price index) rises sligtly because Treasury forecasts cpi inflation of 3.5 per cent. If one uses the RBA inflation estimates which seem more plasible then the real consumption wage is constant.

    The key point here is that this was not what happened in the last three commodity booms where wages rose sharply on all three of the measures just given.

    So the important questions that treasury and the government should answer are these:
    1. What body of macroeconomic knowledge supports their projections?
    2. Can that body of knowledge explain why we had wages breakouts in the previous commodity booms but won’t have a wages breakout this time?
    3. If Treasury has such a body of knowldge why don’t they make it public so that it can be evaluated?
    4. Does the Treasury theory have any implications for Industrial Relations policy?
    5. If the Treasury is wrong, what are the implications for the surplus? Ie what are the true macroeconomic risks to the budget?

  19. Ian Gould
    May 31st, 2008 at 23:49 | #19

    It sounds to me as though at this very moment there’s a junior Treasury economist somewhere in Canberra muttering into his beer “i TOLD them someone would notice.”

  20. cb
    June 1st, 2008 at 00:30 | #20

    I appreciate Professor Harding’s prompt response. Reasonable people can disagree on what is necessary approximation and what is necessary for accuracy. My point was about the level of the wage share, which is at least 10% too low if the imputed earnings of the self-employed are not included. (I found the spreadsheet “6291.0.55.003 Labour Force, Australia, Detailed, Quarterly, Table 13.” on the Australian Bureau of Statistics website. There is a column for “own-account workers” which I guess means the self-employed. They are about 10% the number of employees, so applying the standard assumption that the labour input of the self-employed is the same as for employees, the scaled-up wage share would be 45.9*1.1= about 50.5%. (Actually one should add “employers” in as well, so even higher.) These adjustments do not shift things around that much year to year, but they matter a lot over time. It also answers Stephen L’s question better: the share of own-account workers is not trending upwards.

    One other thing in response to Professor Harding’s point 2 above: I also found the spreadsheet “6302.0 Average Weekly Earnings, Australia, Table 2.” on the Bureau’s website. If I understand correctly, the three other commodity booms were the early 1950s, around 1974 and 1989 (I take this from chart 7 of the terms-of-trade, in the speech by the Head of Treasury Dr Henry here: http://treasury.gov.au/documents/1378/HTML/docshell.asp?URL=ABE%202008.htm). I thought there was one in the early 80s but it doesn’t show in the terms-of-trade.

    These wage data only go from 1983 but I don’t see a wage breakout in 1989. Before that, Australia had a very strange wage-setting system where workers in the non-traded sector were given the same wage increases as the workers in the traded sector. So when there was a commodity boom, the necessary relative wage shift did not happen. Instead, there was just fast wages growth (a “break-out” in the professor’s words).

    The same speech by Dr Henry makes clear why Treasury think this break-out will not happen this time: the wages system is now very different. Seems to me that they are not making a secret of this reasoning. It is in the speech, and we can evaluate it. It would be stranger to me if the same wage break-out did occur this time with such different institutions.

  21. Mark U
    June 2nd, 2008 at 17:01 | #21

    I think Don’s calculations were incorrect originally. In the Australian article, he had a fall in labour’s share of factor income from 46.9% in 2007-08 to 43.1% in 2008-09.

    Assume the 2007-08 figure is correct and then apply the growth rates of 4.25%, 1.25% and 9.25% in wages, employment and nominal GDP. Also assume(as Don does)that indirect taxes less subsidies also grow at 9.25%). Then the new share of factor income for 2008-09 is 45.3% not 43.1%. Instead of a 3.8 percentage point fall in labour’s share of factor income, you get a 1.6 percentage point fall. If you look at Don’s charts there have been many period where labour’s share has moved by much more than this.

  22. Don Harding
    June 2nd, 2008 at 21:38 | #22

    Mark U,
    1. At comment 12 I noted that the Australian published the incorrect numbers from an earlier draft.

    2. Correctly measured the fall in wages share from 2006-07 to 2008-09 is 2 percentage points. This is bigger than the fall over the 11 years of the Howard government. So relative to recent history its big.

    3. You are correct that there have been bigger falls in the wages share but not during commodity booms. In past booms the wage share has increased. There may well be good reasons why the wages share won’t rise much this boom. My position is that Treasury should publically state those reasons. It should also state why it thinks the wages share will fall this time.

    4. I don’t understand why people aren’t more interested in/concerned about the level of the wages share. After all its related to important things like parameters of production functions and the K/L ratio. The projection is for the wages share to go to its lowest level ever. In short labour has never been cheaper. My other point is that in such circumstances I would expect firms to employ more labour. Thats whats been going on for some time. But for no apparent reason Treasury says that all that job creation will slow dramatically. It seems important to ask why?

  23. Ruth Kershaw
    June 3rd, 2008 at 16:20 | #23

    All credit to you all for making this issue, discussion and interpretation of the stats public. It is a critical issue determining what type of society we live in.

    The fact that we have a theologian for a PM, who thinks citing ‘competition’ like some sort of mantra is going to save us and his government from their ignorance of economics, is frankly terrifying.

    Thanks for raising the bar and the legitimacy of our (employee representatives) claim that wages share of income/GDP is a central issue to consider in economic policy considerations (if and when they emerge from this government)

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