Have real wages in Australia grown faster than labour productivity?

That’s what it looks like in this speech that Dr Martin Parkinson, the Treasury Secretary, gave today:

ABEMay2014-10

 

It’s important to be clear what this chart shows, and what it doesn’t show.

This chart does show that the value to workers of the goods and services they can buy with an hour’s wages has, on average, risen faster than the value to employers of the goods and services that employees produce in an hour’s work. But while the value to workers of an hour’s wages has risen steadily, the cost to employers hasn’t risen as much.

How can this be? The terms of trade rose. This means, more or less, that the price of the goods and services we produce as a country rose quicker than the price of the goods and services we consume. As a result, workers were able to enjoy a higher standard of living, without labour’s share of income rising (and capital’s share falling).

That’s the point Dr Parkinson was making in the speech. The relevant part of the speech is about the effect of the rising terms of trade on our living standards over the past decade, and the anticipated effect of the falling terms of trade over the coming decade. It’s not about labour obtaining “unsustainable” wage rises. In fact, the notes to Dr Parkinson’s chart say that the real producer wage, ie. the cost to employers of purchasing an hour’s labour, has risen in line with labour productivity.

Anyone who uses the chart above to make the case that real wage gains have been ‘unsustainable’ or ‘unreasonable’ either doesn’t understand what this chart shows or is seeking to misrepresent it.

 

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