The Distribution of Recent Economic Gains:

Some early observations

Ben Dolman

2

Some early observations

Sources of income growth

The labour share of income

Labour market outcomes

Sources of income growth

4

GDP per capita

-1

0

1

2

3

4

1964-65 to 1973-74

1973-74 to 1981-82

1981-82 to 1989-90

1989-90 to 1999-2000

1999-2000 to 2006-07

-1

0

1

2

3

4

Ave

rage

ann

ual g

row

th in

GD

P p

er

capi

ta (

per

cent

)

5

Market sector output

Con

trib

utio

ns t

o av

erag

e an

nual

gro

wth

in

mar

ket

sect

or o

utpu

t (

perc

enta

ge p

oint

s)

-1

0

1

2

3

4

5

1964-65 to 1973-74

1973-74 to 1981-82

1981-82 to 1989-90

1989-90 to 1999-2000

1999-2000 to 2006-07

-1

0

1

2

3

4

5Multifactor productivity

Capital

Labour

6

Industry contributionsShare of output Share of hours worked

Per

cen

t

Per

cen

t

0

2

4

6

8

10

12

1989-90 1999-00

0

2

4

6

8

10

12ConstructionFinance

Mining

2006-07

0

2

4

6

8

10

12

1989-90 1999-00

0

2

4

6

8

10

12

FinanceConstructionMining

2006-07

7

Market sector output

Con

trib

utio

ns t

o av

erag

e an

nual

gro

wth

in

mar

ket

sect

or o

utpu

t (

perc

enta

ge p

oint

s)

-1

0

1

2

3

4

5

1964-65 to 1973-74

1973-74 to 1981-82

1981-82 to 1989-90

1989-90 to 1999-2000

1999-2000 to 2006-07

-1

0

1

2

3

4

5Multifactor productivity

Capital

Labour

8

Summary Reforms to the supply side of the economy led

to productivity growth in the 1990s. Since then, output growth has been input

driven … Strong investment More workers (though lower average hours)

… and price driven, through soaring terms of trade.

These changes can be identified with changes in demand.

The labour share of income

10

Labour income shares

Per

cen

t of

tot

al f

acto

r in

com

e

50

55

60

65

70

75

80

1964-65 1973-74 1982-83 1991-92 2000-01

50

55

60

65

70

75

80Whole economy

Market sector

1999-2000 2006-071989-901981-82

11

Labour and capitalIn

dexe

s, 1

999-

2000

= 1

00

3.6

4.2

4.9

1964-65 1973-74 1982-83 1991-92 2000-01

0

1

2

Capital-labour ratio

Relative rate of compensation oflabour comapared to capital

35

70

140

35

70

140

1981-82 1989-90 1999-2000 2006-07

12

Labour and capital1981/82

to1989/90

1989/90 to

1999/2000

1999/2000to

2006/07

Initial labour share (%) 65.9 60.8 59.8

Final labour share (%) 60.8 59.8 55.3

Annual change (% pts) -0.6 -0.1 -0.6

13

Labour and capital1981/82

to1989/90

1989/90 to

1999/2000

1999/2000to

2006/07

Initial labour share (%) 65.9 60.8 59.8

Final labour share (%) 60.8 59.8 55.3

Annual change (% pts) -0.6 -0.1 -0.6

Annual contributions (% pts):

Real consumer wage -0.1 0.3 0.5

+ Other changes 0.1 0.1 0.1

― Profit / capital services 0.3 0.0 0.5

― Capital-deepening 0.4 0.6 0.7

Changes in labour income shares …

… within industries

Share of total factor income, per cent

53 54 55 56 57 58 59 60

EGWCOMAGRTRNRETCRSACRMANWHLMIN

CONFII

59.8 per centin 1999/2000

FinanceConstructionMiningWholesaleManufacturingHospitalityCultureRetailTransportAgricultureCommunicationsUtilities

Changes in labour income shares …

… within industries

… between industries

Share of total factor income, per cent53 54 55 56 57 58 59 60

AGRCONCOMCRSTRN

FIIACC

EGWWHLRET

MANMIN

55.3 per centin 2006/07

56.7

MiningManufacturingRetailWholesaleUtilitiesHospitalityFinanceTransportCultureCommunicationsConstructionAgriculture

53 54 55 56 57 58 59 60

EGWCOMAGRTRNRETCRSACRMANWHLMIN

CONFII

59.8 per centin 1999/2000

FinanceConstructionMiningWholesaleManufacturingHospitalityCultureRetailTransportAgricultureCommunicationsUtilities

16

Average return on capitalP

er c

ent

per

annu

m

-10

0

10

20

30

1974-75 1984-85 1994-95 2004-05

-10

0

10

20

30Nominal return

Nominal return less 10-year bond rate

17

Average return on capital

Nom

inal

ret

urn

less

10-

year

bon

d ra

te

(Per

cen

t pe

r an

num

)

-10

0

10

20

30

1974-75 1984-85 1994-95 2004-05

-10

0

10

20

30

Mining Finance and insurance

18

Some implicationsShare price indexes Capital services

4.6

5.0

5.4

1989-90 1994-95 1999-00 2004-05

Mining

Finance and insurance

Market sector

100

150

225

4

5

5

6

7

1989-90 1994-95 1999-00 2004-05

Banks

Resources

ASX200

100

200

50

800

400

Inde

xes,

198

9-90

= 1

00

19

Gross national income

-1

0

1

2

3

4

1964-65 to 1973-74

1973-74 to 1981-82

1981-82 to 1989-90

1989-90 to 1999-2000

1999-2000 to 2006-07

-1

0

1

2

3

4Net income deficit effect

Terms of trade effect

GDP per capita

Con

trib

utio

ns t

o av

erag

e an

nual

gro

wth

in

GN

I pe

r ca

pita

(pe

rcen

tage

poi

nts)

20

Summary Through the 1990s, the benefits of microeconomic

reform were evenly shared with workers – through higher wages and lower output prices – and firms.

Since then the labour income share has fallen mainly because profit rates on capital have increased.

The labour income share has fallen in most market sector industries. The largest contributors are mining (about ½ of the overall fall), construction and finance. These industries have experienced particularly strong demand-driven growth.

Higher profit rates have also seen more earnings remitted offshore.

Labour market outcomes

22

Labour market outcomes

A. Jobless families

B. Jobs growth and the wage distribution

C. Male full-time employment

D. Unemployment and education

23

A. Jobless families

Per

cent

age

of f

amili

es w

ith d

epen

dent

ch

ildre

n an

d no

wor

king

hea

d

0%

5%

10%

15%

20%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

0%

5%

10%

15%

20%Lone parent familiesCouple families

24

B. Jobs growth by wage rate

Ann

ual a

vera

ge g

row

th in

hou

rs

wor

ked

(per

cen

t)

0

1

2

3

1989-90 to 1999-2000 1999-2000 to 2006-07

0

1

2

3

Bottom quintile Second quintile Third quintile Fourth quintile Top quintile

25

C. Male full-time employment

Ful

l-tim

e em

ploy

men

t ra

te (

per

cent

of

civi

lian

popu

latio

n)

0

20

40

60

80

100

15 to 19 20 to 24 25 to 34 35 to 44 45 to 54 55 to 59 60 to 64

0

20

40

60

80

100

1981-82

1999-2000

2006-07

Age group

26

D. Education

55

60

65

70

75

80

85

90

1989 1994 1999 2004

55

60

65

70

75

80

85

90

Degree

Other post-school

No post-school

Employment rate Unemployment rate

Per

cen

t of

civ

ilian

pop

ulat

ion

0

2

4

6

8

10

12

14

16

1989 1994 1999 2004

0

2

4

6

8

10

12

14

16No post-school

Other post-school

Degree

Per

cen

t of

la

bour

for

ce

27

Labour market outcomes

A. Jobless families

B. Jobs growth and the wage distribution

C. Male full-time employment

D. Unemployment and education

28

Concluding observations

Australia’s economic growth this decade has been marked by strong demand growth, particularly in construction, mining and finance.

These have brought much higher profits which in turn appear to have driven strong investment and employment growth.

Labour market outcomes have improved in many ways.