Productivity growth has long been touted as the key to higher living standards, with the promise that its gains will be shared through higher real wages, lower prices, and more free time. However, a recent study by the Centre for Policy Development (CPD) in Australia challenges this narrative, revealing a 30-year trend of declining wages for the typical worker despite rising productivity. This trend raises serious questions about the distribution of wealth and the role of institutions in wage-setting and bargaining.
The CPD's research, presented at the Economic Society of Australia's annual conference, highlights a stark disparity between productivity growth and wage increases. Between 1995 and 2024, while labour productivity in the market sector grew, real average hourly compensation and median hourly earnings for the typical worker lagged behind. This is particularly concerning as median hourly wages better represent the experience of the average worker, as extremely high incomes skew average compensation figures.
The study challenges the Productivity Commission's (PC) argument that the mining and agriculture industries are primarily responsible for wage decoupling. The PC claims that removing these industries from the data set eliminates the problem, but the CPD's research shows that wage decoupling is widespread across industries, especially in sectors with strong productivity growth. For instance, the information media and telecommunications industry, which has experienced the highest productivity growth in the last decade, has seen a clear gap between productivity and median real wages.
This trend is not unique to Australia. International research has shown that wage and productivity decoupling has occurred in many advanced economies. The decline in real wages, despite rising productivity, is a global concern, with the Organisation for Economic Co-operation and Development (OECD) warning of persistent pressures on household incomes.
The CPD's findings also question the assumption that increased productivity leads to reduced work hours. The data suggests that the biggest drops in hours are happening among people with the lowest wages, indicating that part-time work, gig work, and casualisation are the norm, rather than a choice. This raises concerns about the sustainability of productivity gains and their impact on the community and ecology.
The study's authors, Warwick Smith and Adelajda Soltysik, argue that the gains from productivity growth are being increasingly captured by businesses, rather than being shared with workers. This is supported by the work of economic Nobel laureates Daron Acemoglu and Simon Johnson, who emphasize that the distribution of new technologies and their benefits is an economic, social, and political choice. In the context of Australia's current data centre boom, the social licence and environmental risks of these investments are under scrutiny.
The debate about Australia's productivity performance is far from over. Deloitte Access Economics has warned that strong population growth has masked weak underlying productivity, and the Reserve Bank of Australia's chief economist, Sarah Hunter, acknowledges the uncertainty surrounding the impact of AI on productivity growth. As the government pushes to increase labour productivity, the focus on where the gains will flow is crucial, ensuring that any improvements serve the community and the environment.
In conclusion, the CPD's research highlights a critical issue in the relationship between productivity growth and wage increases. It calls for a re-evaluation of the role of institutions in wage-setting and the distribution of productivity gains. As the world grapples with the implications of technological advancements, the need for a more equitable distribution of wealth and a sustainable approach to productivity growth becomes increasingly apparent.
