Government report cheers for wage cuts

There’s been a lot of discussion recently about stagnation in real wages and the decline of the labour share of national income. In a recent Senate Submission, I made the point that there is nothing surprising about this

For the last 40 years, changes in labour market regulation have been almost uniformly anti-union and anti-worker, while public policy has been premised on the desirability of reducing wages.

I saw an interesting (and, I suspect, largely unconscious) illustration of this in a recent report from the grandly-titled Office of the Chief Economists. Among the many benefits of economic reform, the report cited the following

How does this relate to the wage share? When real wages are growing faster than GDP per person (and assuming a constant employment/population ratio, which is reasonably accurate), the wage share of GDP is rising. When real wages are growing more slowly than GDP per person, as they have done for the past 25 years or so, the wage share is falling. Looking at the beginning and end points we can see that wage growth has been slower than GDP growth over the period as a whole So, we can restate the conclusion as

Under the labour market institutions that prevailed between 1951 and 1981, the labour share of income increased. Since then, thanks to the adoption of market based approaches, workers have lost all the ground that they gained in the postwar decades, and then some.

30 thoughts on “Government report cheers for wage cuts

  1. OK.

    A question, Smith. In post #11, 23-march, you claimed:

    So we see that $10,000 of GDP per capita on the LHS vertical axis is tbe same distance above the horizontal axis as $200 of real wages on the RHS.

    Do you still believe this to be true?

  2. @Smith

    The indexed based chart is a better chart. Don’t think anyone would disagree with that. I even agree with you that the original chart arguably mutes the relative decline of real wages against productivity. But IMO that’s because the dark blue line starts higher, not because of scale trickery. The original chart is not objectively wrong.

    Let me put a challenge to you: If you were to accept the hypothesis that the original chart isn’t ‘tricky’ – but just not as clear as it could be – how would you go about defending it as technically accurate?

    Having said all that – I’m not even sure that there is any substantive disagreement here. We all agree that chart(s) show that real wages grew more slowly than real GDP per capita over the full period, and the ‘turning point’ was ~1983. Right?

  3. @EconoManOz

    The text says that since enterprise bargaining began in 1993 real wage growth “aligned more closely” with growth in GDP per capita. (The text mistakenly says growth in changes in GDP per capita). The chart by way of scale trickery shows the two lines close together after 1993 and far apart before 1993.

    This is not muting or mere lack of clarity. The indexed chart shows that post 1993 the gap is bigger and has lasted for longer than when the gap was the other way around. What the original chart tried to show was not an exaggerated version of what is true. It tried to show the opposite of what is true.

  4. @Smith

    Like I said previously, there’s no substantive disagreement here. The chart doesn’t back up the Chief Economist’s claim: real wage growth has been slower than growth in real GDP per capita over the whole period, or from ~1983 onward, or from 1993 onward – take your pick. I can see that in the original chart, or even easier in the index chart. One could plot growth rates directly and make it clearer still! I agree with Luke Elford at #17.

    Perhaps you’re right that they calibrated the chart to ‘try and show’ a particular story. I can’t prove they didn’t. But what’s the old saying about conspiracy versus stuff up? (I’m guessing, if you used that data and let the chart set the scales of the axes automatically, it would come up with those scales.) At least as plausible: they created that chart, and then misinterpreted the lines moving closer together.

    But you explicitly alleged scale ‘trickery’ – that the graph was technically wrong – because the first tick marks on each axis are ‘equal height’ and the right axis didn’t finish at $1600. That is objectively, provably, incorrect.

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