Workers' pay has not kept pace with productivity growth for 30 years, research suggests

We're told that productivity growth is the primary driver of higher living standards.

We're also told that the gains from productivity growth are returned to people in three ways: in higher real wages, lower prices, and more free time.

But researchers from the Centre for Policy Development (CPD) say the typical worker's pay has not kept pace with productivity growth in Australia for 30 years.

They say the gains from productivity growth have been increasingly captured by businesses.

They say their findings raise serious questions about Australia's wage-setting and bargaining institutions, ownership, and the future direction of technology.

They presented their research at the Economic Society of Australia's annual conference in Canberra on Thursday.

It contributes to the debate about where the last 30 years of productivity gains have gone in Australia.

In recent years, the Productivity Commission found there has been no significant decoupling between productivity and labour compensation, but the Australian Bureau of Statistics has found evidence that wages have fallen behind productivity.

International research has also suggested that wage and productivity decoupling has occurred across many advanced economies in recent decades.

The typical worker's experience

The Centre for Policy Development (CPD) researchers were Warwick Smith and Adelajda Soltysik.

Their paper included the graph below, which shows how the typical worker's pay has fallen behind labour productivity growth in Australia in recent decades.

The graph compares labour productivity growth in the market sector (light grey line) to growth in real average hourly compensation (dark grey line) and real median hourly earnings (purple line) between 1995 and 2024.

The "typical worker" is represented by the purple line, since median hourly wages capture the experience of typical workers better than average compensation (extremely high incomes skew averages).

The CPD research questions several findings from the Productivity Commission's (PC) work in this area.

In recent years, the PC has argued that the mining and agriculture industries have been largely responsible for driving what appears to be aggregate wage decoupling across Australia's economy in the last 30 years, but that if you remove those two industries from the data, the problem largely disappears.

"Since 1995, the wages of over 95 per cent of Australia's working population have risen very closely in line with productivity," the PC argued in 2023.

But the CPD researchers challenge that finding. They argue the majority of industries in Australia have seen wages decoupling from productivity growth over the last 30 years, and the gaps have been widest where productivity growth has been strongest. They say the patterns remain when mining and agriculture are excluded from the data.

The graph below comes from the CPD research.

It shows how the information media and telecommunications industry (first column on the left) has experienced the highest productivity growth in the last decade, but real median wages in the industry have clearly not kept pace.

Agriculture and professional services (the second and fourth columns) have also experienced big gaps between productivity growth and median real wages.

Does productivity growth always serve the community and ecology?

The CPD researchers also questioned the Productivity Commission's assumption that as productivity has increased in recent decades, average work hours in Australia have fallen partly because people have been choosing to work less.

The graphic below shows how average weekly hours have drifted down from 38.5 to 36.5 hours since 2001.

Mr Smith said if falling hours reflected a conscious choice by Australians for more leisure, then we should find household hours falling, shifts to part-time work being a choice (rather than a necessity), mothers' post-birth decline in working hours being a choice (rather than a necessity), and the decline in work hours concentrated among Australia's high-income earners who can afford to purchase more leisure.

But that's not what the lots of data show, he said.

"The biggest drops in hours are happening amongst people with the lowest wages," he said.

"This is very much not a choice story. This is telling a story about part-time work, about gig work, and casualisation."

Overall, he said, since the federal government is pushing to lift Australia's rate of labour productivity growth, we need to ask where the gains of any future productivity improvements will flow.

"If we're going to put public resources into increasing productivity, we want to make sure that it is actually in service of our community and our ecology," Smith said.

And he referenced the work of economic Nobel laureates Daron Acemoglu and Simon Johnson.

Acemoglu and Johnson argued in their 2024 bestseller Power and Progress: "There is nothing automatic about new technologies bringing widespread prosperity. Whether they do or not is an economic, social, and political choice."

At the moment, Australia is experiencing a boom in data centre investment and construction, but questions are being raised about their social licence, who will benefit from them, and the climate and environmental risks they pose.

Poor productivity growth, declining real wages

The CPD research comes as the debate about Australia's lacklustre productivity performance has flared up again.

Earlier this week, Deloitte Access Economics said that for too long in Australia, strong population growth has been masking a weak underlying productivity performance and lifting aggregate growth while doing less to improve living standards.

The Organisation for Economic Co-operation and Development (OECD) also warned that the decline in real wage growth in Australia in recent years was "concerning."

"Since the March quarter of 2021, before the surge in energy prices, real hourly wages in Australia have fallen by approximately 5 per cent, representing one of the steepest declines among OECD countries," it said.

"This sustained erosion of purchasing power points to persistent pressures on household incomes, even as the labour market has remained broadly solid."

On Wednesday, Reserve Bank of Australia chief economist Sarah Hunter said central banks could not do much about productivity growth in the medium term.

"AI has the potential to significantly lift productivity growth over the medium term, though the precise scale and timing of any such effect is highly uncertain," she said.