Brian Fallow: Some productivity gains flowing to labour as well as capital in NZ

Growth in real wages paid by firms in the measured sector was strongest during the period of high productivity growth from the mid-1980s to 2000. Photo / NZME.

The belief is taking root, especially in the United States, that a historic decoupling has occurred between growth in labour productivity and workers' incomes.

Globalisation and transformative technological advances have combined, on this view, to hollow out the broad middle of the labour market. All the gains from productivity growth flow to the owners of capital rather than the suppliers of labour, whose wages in real terms have gone nowhere or even backwards for years.

Researchers at the Productivity Commission have been trawling through the New Zealand data to see if that story holds good here.

To some extent, seems to be the conclusion, but probably less so than in other developed economies.

And crucially they have found that the periods of strongest real wage growth during the past 30 years or so have also been the periods of strongest growth in labour productivity.

They analyse changes over the past 35 years in the labour income share (LIS), which is the proportion of gross income from the production of goods and services that producers pay for labour. They focus on the "measured sector" of the economy, the 60 per cent or so where productivity is relatively easy to measure. It includes the primary sector, manufacturing and much of the services sector, but not for instance education or health, and it includes those parts of the economy where you would expect globalisation effects to bite.

The labour income share hit a high of 65.9 per cent in 1981 and had fallen to 56.1 per cent by 2010.

The downward trend was marked by some lurches lower after such policy interventions as Robert Muldoon's wage freeze in the early 1980s and the Employment Contracts Act in the early 1990s. Both were followed by partial recovery in labour's share of the pie, as was another steep decline around the turn of the century when output prices for a while rose a lot faster than wages.

"Outside these three short sharp falls in the LIS, there is some evidence of a more general decline, consistent with the impact of new technology and globalisation seen in other countries," say the report's authors, Paul Conway, Lisa Meehan and Dean Parham.

"Although cross-country comparisons are difficult, this trend decline in the LIS may be less marked in New Zealand given that much of the fall occurred over three short periods. New Zealand's LIS has also increased on average since 2002, in contrast to the ongoing fall in some countries."

And they found that growth in real wages paid by firms in the measured sector was strongest during the period of high productivity growth from the mid-1980s to 2000 and much weaker when productivity growth was lower.

Perhaps with fingers crossed, their conclusion is optimistic: "New technology may ultimately create as many or more jobs than it destroys."

Read the latest Productivity Commission report here: