Tensions opening up in labour economy

According to the OECD Labor Productivity Report Australia’s productivity continues to grow at better than even pace, but only when compared to other developed nations. Compared with prior periods in the last two decades, the growth has been muted. However large it is, productivity growth disconnected from wages growth years ago, to a point where the gap is large, and larger than that in the US. This is a problem in more ways than one.

From 2010 to 2015, Australia experienced growth in productivity that was the envy of the developed world. We can see this in the charts below sourced from the Guardian.

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It is important to note that this measure of labour productivity measures the value added in the economy and records it per unit of labour. That is, labour productivity growth does not refer to how hard people are working.

Instead, it uses hours of labour to measure overall productivity, based on investment and capital expenditure and measures of how much ‘smarter’ the economy is operating. This is known as multi-factor productivity. The chart that follows shows how investment and capital expenditure (known as capital deepening) has added to Australia’s productivity.

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Capital deepening has contributed most significantly to Australia’s productivity in the decade from 2005 to 2015.

As productivity per unit of labour has grown since the late 1990s, hourly compensation has essentially flat-lined, in real terms. This is displayed in the index chart below.

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As Greg Jericho wrote in The Guardian, “As in other nations, our more “flexible” IR system has seen a break between the previously linked productivity growth and worker income.” 

There are other measures that are expanding the gap between productivity and remuneration. The above chart shows the gap in the amount of pay per hour, compared with hourly productivity growth.

But, as the chart below shows, Australians have, on average, not worked less since 1994. At an average of 21 hours per week, the decline in average hours worked has been very steep.

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The result is that Australians are, on average working less hours and compared with productivity growth in particular, are earning less for those hours they do work.

There should be no surprise with declining average worked hours and flat-lining real wages, that unemployment rates are stubbornly persisting at close to 6%. We can see this in the chart below.

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To go straight to the dashboard and take a closer look at the data, click here.

In April, the unemployment rate was 5.8%, but the number of unemployed people rose by 5,000 to 753,100, the highest it has been since January 2016. But in addition, to underscore the changing nature of Australia’s employment in this modern economy, part time employment has been growing quite strongly.

That is no surprise given the reduced average hours of work, but as the chart below shows, part time work has been growing continuously. The participation rate (the proportion of those eligible for work who have employment) has not increased, even as the amount of part time employment has grown. Underemployment in the economy is rife.

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To go straight to the dashboard and take a closer look at the data, click here.

Although given the data about working hours, this comes as no surprise, unlike Australia’s productivity growth – top of the OECD – workers’ wages growth has been towards the bottom of the OECD pack. The chart below shows Australia’s ranking.

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Significantly, the gap between US labour productivity and hourly wages growth has been less than that of Australia, as the next chart demonstrates. It is important to be clear about this, and Greg Jericho’s comments are appropriate here:

“That’s a pretty damning indictment of our IR system – our workers are getting less reward for productivity benefits than the USA.”

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There may come a point when the growing gap between productivity and wages becomes a point of conflict. But whether that happens or not, the apparent under-utilisation of the nation’s labour resources is a serious issue.

A copy of the full OECD report can be found at: http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-compendium-of-productivity-indicators-2017_pdtvy-2017-en#page1