The lie about productivity and wages

Written By: - Date published: 12:30 pm, February 5th, 2015 - 49 comments
Categories: capitalism, economy, employment, Unions, wages - Tags: , , , ,

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.

49 comments on “The lie about productivity and wages”

  1. Sacha 1

    Workers have been shafted in the interest of owners yet this daft Commission does its best to distort that conclusion. Reveals its true colours again as a creature of Act.

    Same nitwits providing cover for the government ripping into Councils and the RMA over housing, rather than financiers.

  2. framu 2

    where does don brash work again?

  3. Hawk 3

    It may not be as sinister as that.

    The productivity of workers depends not only on an increased amount of effort, but also having access to better equipment. This equipment is provided for by capital.

    The long-term trend of the LIS could just be explained by industries moving away from labour-intensive work, to capital-intensive.

    • This is addressed in the post. Technology and investment is one factor influencing LIS, but the Commission clearly states that globalisation and reduced bargaining power are also factors.

      The media release also notes that “…factors such as relatively low wages and high capital costs, coupled with small domestic markets and limited international engagement, discourage firms from investing to the same extent in new capital and technology.” We currently have a low-wage economy (and National has promoted low wages as a “competitive” advantage) and many manufacturing businesses have folded or moved work overseas because it’s simply not financially practical to invest in upgrades or new tech.

      Ultimately, for me, the fact that the Commission has to use the kind of language quoted in the post to paper over the fact that workers’ share hasn’t matched productivity says it all.

      • Sacha 3.1.1

        I think it was Rod Oram who pointed out that the Employment Contracts Act was a disaster for NZ’s capital intensity because it made it cheaper for owners to just hire more staff than to invest in technology, training or R&D like firms in other nations do. Too much profit siphoned into unproductive residential property and flash cars instead.

      • thechangeling 3.1.2

        “Globalisation” is a terrible misnomer and is in fact completely disingenuous.
        The correct and full description for this period of political/economic and social history is in fact: neo-liberal globalisation.

  4. shorts 4

    we see many articles on the growth of the 1% – I think that answers where the benefits of the increase in productivity has gone

    Another take on the same thing I was reading yesterday:

    “So why did Rob Stanley, an unskilled high school graduate, live so much better than someone with similar qualifications could even dream of today? Because the workers at Interlake Steel were represented by the United Steelworkers of America, who demanded a decent salary for all jobs. The workers at KFC are represented by nobody but themselves, so they have to accept a wage a few cents above what Congress has decided is criminal.”

    http://www.salon.com/2013/12/30/the_middle_class_myth_heres_why_wages_are_really_so_low_today/

    In short we’ve been screwed, right royally… I used to be a really hard worker, not anymore cause over my lifetime I’ve benefited less and less from my efforts… now I am just a solid employee who dreams of doing anything other than enriching others while struggling more and more

    • Draco T Bastard 4.1

      +1

      No matter how much I’m paid I’m not incentivised to make bludgers richer from my work.

      • Wensleydale 4.1.1

        There’s a lot of us like that. We show up to work, go through the motions, and then go home. We’re still doing our jobs and doing them well, but all this corporate propaganda about “going the extra mile” because “when the company is doing well, so are employees” is both insulting and complete bollocks. We’re doing the same. We’re treading water. We’re driving a forklift in circles. And if anyone genuinely believes that most companies will voluntarily share the rewards of increased productivity with their employees, particularly blue collar, then they’re delusional.

        It’s all about returns to shareholders, bigger dividends and management bonuses, and it’ll stay that way because people are too scared to cause a fuss for fear of losing their jobs. An anxious workforce is a compliant workforce. And that’s just the way some companies like it.

  5. Tiger Mountain 5

    Several graphs circulated by the NZCTU show clearly how links of wage increases to productivity parted company in 1991 and remain so now, ’91 by no coincidence, was the introduction of the original Employment Contracts Act, Nationals union busting law.

    The good news is it still pays to belong to a union in this country as union members still regularly receive wage increases small as they may be! I would like the Nats to drop the Labour policy of WFF so more people would hopefully organise and obtain wage rises from employers rather than other tax payers.

  6. TheBlackKitten 6

    Our wages have been low & out of proportion with the cost of the basic essentials for years and it seems to be trending that they will decrease further. There are several factors that are contributing towards this.
    a) Introduction of the ECA Act in 1991by National. This act is responsible for the demise of many unions (some who deserved it and others who did not) and took away the old award wage & replaced it with the so called minimum wage. Before the ECA, unions had a award wage for each type of job that took into account of what skills and experience and qualifications the job required. Fast forward today and we have a minimum wage that can be paid regardless of the type of work you do ie if you are desperate to get into the graphic design industry then an employer can pay you the standard $13.75 per hour despite the skills & qualifications you have.
    b) High Unemployment – The best answer for high wages would be for the supply and demand to swap from what it is currently now. To have more jobs than people applying would force employers to pay more irrespective of union representation. I think employers and all the rich know this & deliberately keep unemployment high & have done so for years.
    c) Left winged parties of today have taken their eye off looking at key economic issues that their forbearers fought for & have instead put their focus on issues such as gender, race etc. Due to their distraction, the wealthy have been busy gradually taking more of the pie over the last 30 or so years.
    d) Globalisation has given big corporates more opportunity to take advantage of those that live in third world countries & to exploit them for their cheap labour. The result has been less jobs for us & less pay for the jobs that are still available.
    e) The cost of living for food, power and housing is vastly out of proportion with what people get paid in wages. Look at who owns the supermarkets, the power companies and materials for house building and you will see companies that contain overpaid CEO’s along with the usual higher management and shareholders that demand high dividend & bonus pay-outs. Pay outs that usually exceed the average wage by tenfold. The general public are being gouged to support this lavish lifestyle as they have no choice but to purchase the necessities that these companies provide & these companies/entities are never held accountable as to why they charge what they do for their products/services.
    If we really want wages to be more in proportion then left winged parties need to bring their focus back to the key economic issues that effect people and not just NZ, but the whole world.

    • Draco T Bastard 6.1

      b) High Unemployment – The best answer for high wages would be for the supply and demand to swap from what it is currently now. To have more jobs than people applying would force employers to pay more irrespective of union representation. I think employers and all the rich know this & deliberately keep unemployment high & have done so for years.

      That’s why it became government policy to have ~6% unemployment rather than the full employment that the government used to maintain.

      • thechangeling 6.1.1

        You forgot to mention Free Trade Agreements (FTS’s) because they are the direct cause of unemployment in New Zealand. When there’s a large imbalance between what we as a nation produce and what we actually consume, unemployment results as this balance is out of kilter due to neo liberal policies. FTA’s in fact only benefit the primary sector of the New Zealand economy whilst the manufacturing sector continues to contract when faced with fierce international competition at home and abroad.

      • BassGuy 6.1.2

        It’s also government policy to blame (and, to a degree, persecute and harass) the unemployed for their situation even though it is a result of government policy. (So very glad I don’t have to deal with Work and Income.)

  7. The Murphey 7

    Fits with the lie about ‘export lead recovery ‘

  8. Draco T Bastard 8

    If all else remains the same then an increase in productivity must result in a decrease in wages.

    Which is what we’ve actually seen over the last thirty years of free-market BS. Sure, not everything has remained the same but the changes haven’t offset the decreasing wages enough thus we see a shift in the generated income from workers to the owners.

  9. Colonial Rawshark 9

    I think this report confirms that workers need to start owning the businesses and the productive capital of this nation, to sit on the boards of directors themselves, and to stop being wage and salary serfs.

    • The lost sheep 9.2

      A lot of NZ businesses were in fact started by workers exactly as you suggest CR.

      Me and OAB for instance. Must be a few others on this blog?

      What really surprises me is that it isn’t more common in NZ. It’s such an obvious thing to do if you don’t want to be a “serf”, as you put it.

      How about you CR – you have started a business?

      • millsy 9.2.1

        Actually CR is on record is having his own business. He has spoken about it numerous times. So do many other of those who are viewed of as ‘far left’ incidentally.

  10. Grim 10

    We are all agreed then, wages must increase.

    In a nutshell:
    if the wage component of production decreases, then the ability of wage earners to purchase products decreases.

  11. It is a much stronger argument for social ownership to look to the theory that has always stated that a rising share of labour productivity going to capital is a defining feature of capitalism, i.e. Marxism.

    In other words this tendency is an historic law that prevails whatever the fluctuations in the relative bargaining power of labour and capital.

    It reflects the reality that capital must invest in increasing labour productivity by spending relatively more money on plant and machinery than on wages.

    Increasing labour productivity means reducing the necessary labour time to produce a given commodity. The value consumed by the workers to reproduce their labour power – roughly the wage – is earned in this necessary labour time, the difference making up the total value in the commodity is surplus labour time, or the share of capital.

    As labour becomes more productive its share of total labour time is reduced without any attempt to drive down its value below its value by attacking real wages (eg ECA).

    Marxists call the rate of productivity the rate of exploitation or, S/V, where V equals the value of necessary labour time and S is surplus labour time.

    So, while the rate of exploitation goes up historically with the rate of labour productivity, at the same time this increased rate of exploitation cannot keep pace with the organic composition of capital.

    Organic composition means the relative rise of Constant capital to Variable capital.

    Money spend on plant and machinery (and raw materials) is Constant capital, because its value remains constant i.e. transmits part of its value into commodities by being used up by labour in the production process but does not add new value.

    The new value added by labour-power is Variable capital, because it adds more value than its own during the production process.

    As the proportion of C rises relative to V, the rate of exploitation s/v has to rise at a faster rate to realise an increase in the rate of profit = S/C+V

    So here we have a theory that penetrates the veil of bourgeois ideology to prove that labour produces all value and that profits are the expropriation of surplus value.

    Second, that the process of expropriation has historic limits set by the organic composition of capital.

    Third, these historic limits show that capitalism becomes increasingly destructive in its attempt to overcome these limits at the expense of the destruction of labour power and and the forces of nature.

    Fourth, that capital has in the process of increasing labour productivity in its own interests laid the basis for its socialisation and the use of such advanced productive forces to build a socialist society capable of sustaining human civilisation and the Earth’s ecological balance.

    • Tiger Mountain 11.1

      two questions Dave; I have my take on these, just wondered what yours might be.
      • what about the tendency for the rate of profit to fall? Is this still another reason capitalists crack down on labour.

      • Given there are fewer large scale “dark satanic mill” type enterprises in NZ anyway these days of service and IT work, how would you explain to a member of the precariat, a ‘self employed’ home office worker or dependent contractor about how they are exploited by capital?

      • dave brown 11.1.1

        G’day TM
        The Tendency for the Rate of Profit to Fall is the main reason that capital cracks down on labour IMO.
        As explained above the logic is clear.
        There have been plenty of debates on this ‘law’ and I am on the TRPF side.
        There is much supporting evidence for this, and in NZ too.
        Michael Roberts is one of the better bloggers in defence of the TRPF globally.
        https://thenextrecession.wordpress.com/

        Capital in NZ is after Rogernomics multinational so its competitive advantage that counts. New technology may have changed the face of work.
        But I think the important distinction is between productive and unproductive work rather than the description of the job. Its easy to get sucked into arguments about the end of the working class when people usually mean IT workers or call centre workers who produce commodities in devilish conditions.
        I think the ‘precariat’ means ‘floating reserve army’ in the old fashioned language. Something suffered by women for ever, but now extended to youth, migrants and middle aged.
        Since restructuring I think we have to call most self-employed as ‘disguised workers’ until proven otherwise.
        And last but not least unpaid domestic work and voluntary work, while not counted by Marx as productive, I think we have to say all such work that contributes to the reproduction of wage labour is integral to wage labour.

        I say to them you are all workers dependent on your labour to live and part of the working class as opposed to those who live off the labour of others.
        Unite union has in its constitution the representation of low paid workers, unemployed and beneficiaries. All unions should fight to make this the reality.

  12. adam 12

    So lets just say what’s happening.

    Liberalism as an ideology is a dog. It only works via the exploration of working people. It can’t pay a fair shear, because as an ideology it’s internal common sense is about as fair as Genghis Khan.

    Productivity is just another smoke screen of an flawed ideology making it up as it goes along.

  13. bluewave 13

    Something missing from the report – there is no discussion of who owns capital and who ‘owns’ labour. Capital tends to be concentrated in the hands of a small number of people who are already wealthy, compared to labour. So the total “share” going to capital or labour is only part of the story.

  14. Bill 14

    I leapfrogged through to the actual report hoping it wasn’t all dissembled gobbly-gook. The very first paragraph killed that hope dead.

    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.

    Or, put another way. LIS falls over a 35 year period. Unmentioned – that 35 year period is more or less the same period of time that NZ governments have bashed us with neo-classical economic prescriptions with the passion of cultists.

    Growth in real wages may well ‘closely aligned’ to productivity growth, but do they rise in step with productivity growth? Well, no – the LIS has fallen over these past 35 years.

    The ‘good news’ is that there is no systemic link between productivity growth and falls in the LIS.

    And so on.

    One paragraph containing so much misleading tosh! I’d hate to make any attempt to cut through the flaff of the entire report.

    Oh – hang on, how about this? The working class has been shafted. – end.

    • To be honest, Bill, I decided to start with the summary and see if it warranted going through to the full report. My reaction was pretty much identical to yours!

      I love that first bit you quoted – “besides the three times when it’s fallen, it’s actually grown quite well!”

      • Bill 14.1.1

        Something that warrants comment is the fact they try to posit the whole thing as independent and so, by implication, somewhat impartial.

        Meanwhile, the ‘Our Team’ link on the page appears to show a ‘team’ of people very much in step with one another (background previous experience etc) and very much in lock-step with current, widely discredited, economic orthodoxy.

        Lots of positions connected to privatisation of the public sector and treasury. Worth perusing.

        http://www.productivity.govt.nz/about-us/our-team-0

  15. Cameron’s Conservative Party Conference Rap (playing on high rotation on John Key’s iPod)…

    I’m hardcore and I know the score
    And I am disgusted by the poor
    And my chums matter more
    Because we are the law
    And I’ve made sure
    We’re ready for class war
    Taking money from the man who works long hours
    Giving power to the tycoons in the glass towers
    That is why I can look you in the eye
    And say This is the party of the motherfuckers
    We don’t care about them other suckers
    Because this is the party of the motherfuckers
    And no, I don’t think that’s a dirty word
    So let the beat drop
    I come here with flows right from the top
    Everybody knows if you work in a shop
    We won’t help you, and do you know what?
    People rising from the bottom to the top
    Has got to stop
    We have the bravery
    To bring back slavery.
    Working in a supermarket
    Is just the start of it
    My friends
    There is no job at the end of it
    You will be working for your benefits
    Forever.
    Let me get this off my chest
    Saying yes
    We are selling the NHS
    And we’ll give you less
    And that is just for starters
    Even after privatising sticking plasters
    It is a social disaster
    That makes our hearts beat faster
    Now, I am your master
    The last thing this country needs is
    Us, the Conservatives
    Worse than the alternative
    We don’t care
    if you’re driven to despair
    Don’t you dare say
    It’s not fair

    I’m not saying it’s not funny
    It is for me, I’ve got loads of money
    This is the party of the motherfuckers
    The country is run for me and my muckers
    This is the party of the the motherfuckers
    We just don’t care about them other suckers

  16. NZJester 16

    You have lots of business telling workers that they can not afford to give them a very big raise while giving the CEO a big raise that if split among the workers would have given them more than they had asked for.
    A lot of the CEOs get bonus also for the business meeting targets, yet it was not their doing but the workers efforts that are responsible for that and they should be the ones to get most of that bonus, not the CEO!

  17. Colonial Rawshark 17

    We need workers on the boards of these companies, and we need at least 1/3 the shareholding to be in the hands of the workers too.

  18. Lloyd 18

    This Gnat government has never given a shit about making the economy more flexible. One of the first things they did after replacing Helen’s government was to get rid of tax incentives for Research and Development.

    Research and development is surely the most powerful way to making an economy more flexible.

    • Colonial Rawshark 18.1

      Although the market driven/tax incentive model was spectacularly weak as well. If the Labour government had really wanted R&D to should have invested an additional 1% of GDP into it.

  19. DH 19

    “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.””

    I don’t really understand this view. I first met it when studying labour relations and it seems counterproductive to me, it aims at the wrong target.

    In most cases the bosses are workers themselves. They’re not owners of capital.
    A business can only generate so much gross profit. Wages are paid out of that gross profit and the pool allocated to wages tends to be pretty consistent across the decades. Who gets what share of that wages pool is what income equality is more about.

    I’d suggest that upper management gets paid a higher percentage of total wages than previously and that, IMO, is where the real problem is.

    One of the lesser known roles unions played was preventing the avaricious management from thieving all the wages for themselves. The unions kept an eagle eye on management salaries and made sure the rest of the workers got their fair share.

  20. Redelusion 20

    Buy some shares and workers can be owners of capital as well, Not all bosses or I dear say most bosses do not own the firm they work for and are thus just workers to. These greedy capital owners does it include the 100s of thousands of kiwi workers who have kiwi savers accounts

  21. felix 21

    Aww how cute, Redelusion pretends to not notice that the post is about workers and owners, not workers and shift-managers.

    Bless.

  22. Redelusion 22

    Felix you numb nut answer the question are KiwiSavers capital owning scum in your fantasy world the post is simplistic as it assumes bosses are owners which is plainly in most cases not the case, Dinosour Union class warfare thinking similarly are all small business owners that labour also so wants to support also capitalist ripping off the poor one or two workers they have, spare me some of this leftie BS

    • Colonial Rawshark 22.1

      KiwiSaver – another rort by private financiers and Wall St traders playing the casino markets with workers’ funds.

      What counts is major shareholdings and directorships in your own place of work, along with the ability to hire and fire management.

      • millsy 22.1.1

        “…KiwiSaver – another rort by private financiers and Wall St traders playing the casino markets with workers’ funds…”

        And a way for the powers-that-be to soften up the public for the gutting/axing of National Superannuation.

        • Colonial Rawshark 22.1.1.1

          Privatisation of pension schemes and shifting them to Wall St brokers was a massive move of money in the US in the 90’s and 2000’s. Labour is just stupid enough to open up the door to this kind of thing here in NZ with implementing something like KiwiSaver, not having a public option, and one of these days National will take it to its logical conclusion.

          Stupid.

    • felix 22.2

      As far as I can see you’re the only one here confused about the word “boss” in the context of a discussion about owners of capital vs workers.

      Now get off the interwebs you’ve got a cleanup in aisle 3 to take care of.

  23. Murray Simmonds 23

    There are lies, damned lies, and Neoliberal economists.

    The Statisticians don’t even get a look in, these days!

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