TRENDS IN THE LABOUR INCOME SHARE IN AUSTRALIA
The share of income from production that is paid to labour has witnessed renewed interest in recent years among research and policy communities across OECD countries, including in Australia. The labour income share and its measurement are relevant for studying a number of economic issues, such as average wage growth, sources of inflation and income inequality. The ABS Industry Multifactor Productivity datacube contains estimates of the labour income share both at industry and aggregate levels.
This feature article highlights how data contained in this release can be used to analyse trends in the labour income share at the industry level and provides a handful of stylised facts about the labour income shares. It also shows how the data can be used to conduct a decomposition analysis of the change in labour income share for the market sector into a within-industry effect and between-industry effect.
Over long periods of time, the labour income share is typically fairly stable. This stability was, for example, one of Kaldor’s (1957) stylized facts of economic growth. However, in recent years there have been a number of studies reporting marked declines in labour income shares, such as Cho, Hwang and Schreyer (2017), IMF (2017) and Karabarbounis and Neiman (2014).
These studies have found that labour income shares have been trending down since the 1980s in most advanced economies and some developing countries with diverse variations across countries and industries. According to the IMF (2017), from 1991 to 2014, the average global labour income share declined around 2 percentage points. Cho, Hwang and Schreyer (2017) focused on OECD countries, and reported an average of 1 percentage point decline in labour income shares for OECD countries from 1995 to 2014. However, outcomes have varied by country: the labour income share increased during the same period in France, Italy, Sweden, Denmark, Finland, and the United Kingdom. At an industry level and looking across the OECD, labour income shares have typically fallen in manufacturing, transportation, mining and financial services, but risen in industries such as agriculture, real estate and accommodation.
A number of explanations have been proposed for the observed declines in labour income shares, such as technological changes that have tended to lower the cost of capital, globalisation that has expanded the pool of labour available, changes in institutional arrangements that have reduced the bargaining power of labour and growth in the profits of large and dominant ‘superstar’ firms in some industries.
MEASURING LABOUR INCOME SHARES IN AUSTRALIA
Gross Domestic Product (GDP) can be measured based on final expenditure, production of value added by industry or based on total Income earned in production. From the income perspective, GDP is equal to the value added created by labour and capital in total and the labour income share is defined as the ratio of labour income to GDP. Similarly, value added can be split into income paid to labour and capital for each industry.
The main measurement challenge is to allocate gross mixed income between labour and capital. The total compensation of employees is treated as labour income and includes wages and salaries, employers’ contribution to superannuation and other types of social contributions related to labour hiring. Similarly, the gross operating surplus of incorporated businesses is treated as capital income. However, the income accruing to proprietors of unincorporated businesses is mixture of labour income, reflecting the value of the time the owner puts into the business, and capital income reflecting a return on capital equipment and entrepreneurialism.
An estimate of the labour income of proprietors of unincorporated businesses is calculated based on the hours they work and the average hourly wage across employees in that industry. An estimate of the capital income of unincorporated businesses is calculated assuming that the rate of return on capital equipment is the same as for incorporated businesses in that industry. To ensure that the sum of labour and capital income for unincorporated businesses equals gross mixed income, any residual is shared between labour and capital. These estimates are published in Table 14 of this release. For detailed description of how mixed incomes are decomposed into labour and capital components, see Chapter 19 of Australian System of National Accounts: Concepts, Sources and Methods (cat. no. 5216.0).
ANALYSING LABOUR INCOME SHARES MOVEMENTS IN AUSTRALIA
The broad pictures of labour income shares over the past two decades is shown in Chart 1, which shows movements in measures of the labour income share for the 12 industry and 16 industry market sector aggregates. Consistent with the general global trend, the labour share of income has declined over the past two decades in Australia. There was a steady decline through the late 1990s and early 2000s, which was temporarily disrupted by the effect of the global financial crisis on company profits in 2007-08. In recent years, the labour income share has been relatively volatile during a period of large movements in commodity prices that also affect company profits.
CHART 1: AGGREGATE LABOUR INCOME SHARES BETWEEN 1997-98 AND 2016-17
Chart 2 shows the average labour income share by industry over the previous two decades. Industries with a high average labour income share tend to be service industries, while those with lower average labour income shares tend to be more capital intensive.
CHART 2: AVERAGE LABOUR INCOME SHARES BY INDUSTRY 1997-98 TO 2016-17
As labour income shares vary from year to year, it is useful to compare average labour income shares across recent decades. The financial year 2007-08 witnessed the eruption of the global financial crisis, which had lasting effects on the development of the world economy and provides a natural point at which to break the sample of years into two decade long periods. The first sub-period considered is the decade 1997-98 to 2006-07, and the second is the decade 2007-08 to 2016-17.
Between these two decades, a number of trends are apparent. First, the labour income share fell within most industries, with eleven out of 16 industries recording declines over this time. Second, the decline in labour income shares was largest within Professional, Scientific and Technical Services, Agriculture and Finance and Insurance, indicating that these industries became more capital-intensive over this time. Finally, the labour income share rose within a small number of industries, most notably within manufacturing, which has seen a reduction in the size of some capital-intensive parts of the industry such as steel and aluminium manufacturing and petroleum refining.
CHART 3: LABOUR SHARES CHANGES BETWEEN 1994-95 TO 2006-07 AND 2007-08 TO 2016-17
CHANGES IN INDUSTRY STRUCTURE
Changes in the aggregate labour income share over time can be attributed to changes in the labour income share within each industry and changes in the industry structure of the economy. That is, changes in the economy that see the expansion of industries with high labour income shares will tend to raise the aggregate labour income share, while the expansion of industries with low labour income shares will tend to lower it. We use the following decomposition method to separate changes in the labour income share into changes in shares within industries (the first term) and changes in the relative size of market sector industries (the second term):
denotes labour income share, w
denotes value added share of an industry in the market sector, m
stands for market sector, i
denotes the change in the variable
denotes the average of the variable
. Table 1 reports the decomposition results.
TABLE 1 DECOMPOSITION ANALYSIS OF LABOUR INCOME SHARE CHANGES BY MARKET SECTOR INDUSTRIES
Value added share
Labour income share
1997-98 to 2006-07
2007-08 to 2016-17
1997-98 to 2006-07
2007-08 to 2016-17
There are a number of prominent changes in the structure of the Australian economy worth noting. The decline in the share of manufacturing in the Australian economy has had little impact on the aggregate figures because the labour income share in that industry is similar to the market sector average. The mining industry is the most capital-intensive industry in the Australian economy and its expansion has reduced the labour income share by around 1.5 percentage points between the two decades. On the other hand, the growth in labour-intensive service industries such as Professional, Scientific and Technical Services, Administrative and Support Services and Construction has tended to increase the labour income share. These changes have largely offset, and the decomposition shows that 83 per cent of the decline in the labour income share for market sector over the past two decades is due to within-industry changes, and only 17 per cent is due to between-industry changes. Outside of the market sector, and so not reflected in this table, there has also been growth in Health Care & Social Assistance and Education & Training, which are both labour intensive industries.
Combining the within and between industry contributions provides a measure of the contribution that each industry has made to the aggregate decline in the labour income share. In particular, the expansion of the Mining industry and the decline in the labour income share within the Finance and Insurance industry together account for the aggregate decline over the past two decades.
SUMMARY AND CONCLUSIONS
The ABS estimates of labour income shares by industry reflect careful treatment of the income of proprietors of unincorporated businesses. These data allow an understanding of the contribution that changes within industries and changes in the structure of the Australian economy make to overall trends. Like many other countries, the labour income share in Australia has declined over the past two decades, in Australia’s case primarily due to the Mining and Finance and Insurance industries.
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- Cho, T., S. Hwang and P. Schreyer (2017), “Has the Labour Share Declined?: It Depends”, OECD Statistics Working Papers, 2017/01, OECD Publishing, Paris.
- IMF (2017), Understanding the downward trend in labour income shares, Chapter 3 in World Economic Outlook: Gaining momentum, International Monetary Fund, April.
- Kaldor, N. (1957), “A model of economic growth.” Economic Journal 67(268):591-624.
- Karabarbounis, L. and B. Neiman (2014), “The Global Decline of the Labor Share”, Quarterly Journal of Economics, 61-103.