The lie about productivity and wages

The Productivity Commission has a new report out which looks at changes in the labour income share, or LIS, from 1978 to 2010.

The labour income share is described in the report’s summary as:

The labour income share (LIS) measures the split of national income between workers who supply labour and the owners of capital.

To a non-economist like me, that’s pretty much “how much the workers are getting out of their work and how much is going to the boss.”

The media release is pretty cheery about our labour income share:

“Even though the LIS has fallen overall in the measured sector of the New Zealand economy, the evidence is that the real wages firms pay their workers increase more rapidly when productivity growth is strong”, says Paul Conway, Director of Economics and Research.

“Over time, growth in real wages paid by firms in the measured sector was strongest during New Zealand’s period of high productivity growth from the mid-1980s to 2000 and much weaker when productivity growth was lower. Higher real-wage increases are also more likely in high-productivity-growth industries.

It sounds great, superficially. When productivity growth is high, we get the “strongest” wage increases. It makes perfect sense: obviously employers – being pure rational economic actors – pay people commensurate to their productivity. If you work harder, you get paid more.

But take another look at that first clause:

Even though the LIS has fallen overall in the measured sector of the New Zealand economy

And look at this, from the summary linked to above:

The LIS has recently been the focus of considerable international concern that growth in real wages has fallen behind growth in labour productivity. When this occurs, the LIS falls as the share of national income going to labour decreases and capital receives a bigger slice.

That is to say: even though workers are more “productive”, their income hasn’t increased in proportion to their productivity.

They’re working harder, but not getting paid more in return for it.

But the Productivity Commission urges you not to jump to any hasty conclusions:

While this work is mainly about the split of the income “pie” across labour and capital, it is also important to keep in mind the growth of the pie as a whole. For example, if productivity growth is fast enough, real wages could still be rising at a reasonable pace even when the LIS is falling. To the extent that income has an important bearing on wellbeing, this may be preferable to an economy in which the LIS is constant because real wages and productivity are both stagnating.

Ah, yes. Grow the pie. Ignore the fact your slice of it is shrinking in comparison to the bosses’.

There’s a bizarre implied threat there. Hey, workers, don’t get too antsy about the fact you’re not being fairly recompensed for producing more work, because you could be living in a dystopia where you get a fairer share but the owners are making less money!

So, what are the reasons for the globally-observed fall in LIS?

This fall in the LIS has been attributed to a number of influences, including new technology, globalisation and reductions in worker bargaining power.

New technology isn’t the problem – of course when you put Ellen Ripley in a power loader she shifts more stuff for the same effort – but “globalisation” and “reductions in worker bargaining power” are pretty telling. That means: we’re making more money exploiting labour in the developed world. That means: we smashed the unions so you have to settle for what your employer deigns to offer.

The Productivity Commission opines that this report “underline[s] the need for New Zealand to have a resilient and flexible economy which can adjust to new technology and help workers adapt to new jobs. The emphasis needs to be on adapting to change, rather than resisting it.”

But who else talks about making the economy more “flexible”? The National government, while pushing through law changes which undermine worker bargaining power.

I’m going to go with the PSA, which takes a different view:

Report confirms workers need a pay rise.

What do you reckon?

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