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Working people’s share of income – a brief New Zealand history

The share of income that working people receive from all the income generated by their work – the labour income share – is important for many reasons and has long been of interest. It is a measure of income inequality because the richest people in the country tend to make most of their money from “unearned” income from wealth such as dividends, interest and capital gain rather than work – the capital income share. If the labour income share is falling it can mean that wages are not keeping up with rising productivity. It is also a way to compare wages (and the cost of labour to employers) between countries. New Zealand’s labour income share fell steeply after the 1980s – one of the sharpest falls in the OECD. The share going to wages and salaries is low compared to most other OECD countries.

Current official data goes back to 1972. What happened before then and how it has changed over our history. Has New Zealand’s labour income share always been low? Other income inequality measures show high inequality in the early part of the 20th century, falling during the 1940s and 50s with the welfare state, stronger unionism and collective bargaining and progressive tax systems, but rising back to high levels since the 1980s. Is the labour income share similar?

In short, there was a rise in the income share for wage and salary earners between the 1940s and 1970s and a steep fall from the early 1980s. The fall resulted from a combination of wage freezes, radical restructuring of the economy and the state, deregulation and individualisation of employment relationships and deunionisation. It brought the labour share far below the OECD median and comparable economies.

Part of the reason for the pre-1970s rise was the fall in self-employment (dominated by farming), many becoming employees. By 2016, the self-employed had their lowest share of income since 1939. The largest beneficiary was corporate profits which rose to a 19 percent share in 2016, a level reached before only in 1940 under wartime conditions.

Labour productivity and real wages (wages after taking account of inflation) appear to have been closely in sync only during the period 1947 to 1974 when New Zealand’s industrial conciliation and arbitration system of collective bargaining extended by awards was working relatively well. From about 1990, under the deregulated employment conditions resulting from the Employment Contracts Act 1991, real wage growth fell behind productivity growth.

Download the full bulletin: CTU Economic Bulletin 190 – June 2017