Who benefits from productivity growth? The labour income share in New Zealand

There is international interest in changes in the labour income share. In part, this reflects concerns that in a number of countries, real wage growth has not kept pace with labour productivity growth in an environment of rapidly changing technology. This paper investigates changes in the labour income share in the “measured sector” of the New Zealand economy and provides insights into the causes of these changes. Changes in the labour income share are decomposed into contributions from productivity growth and changes in quantities and prices in labour, capital and product markets. Industry contributions to changes in the labour income share are also examined, and comparisons with Australia are drawn. It turns out that the LIS has fallen in the measured sector of the New Zealand over the past 35 years in no small part because of sharp falls over three short periods. Aside from these falls, results also show that growth in real wages has been closely aligned with productivity growth and that there is no systematic relationship between strong productivity growth and falls in the labour income share. Indeed, the important message from the paper is that strong productivity growth sustains strong growth in real wages.