Real Wages and Productivity in New Zealand

The standard neo­classical model implies that the real wage should equate to the marginal product of labour, and therefore wages should, at least in the long run, rise at the same rate as labour productivity. That also underlies much of the politics of wage setting. This paper investigates the empirical relationship between real wages and labour productivity in New Zealand. It first looks at the labour share of income (GDP) and finds that the share has fallen in recent years indicating that real wages are also falling behind increases in labour productivity. It then considers variants of three wage measures that are available: the average hourly wage, the Labour Cost Index and the Compensation of Employees measure which is part of the National Accounts. In real terms, increases in the average wage and in the Compensation of Employees measure fall well behind increasing labour productivity. An analytical (non­official) series of the LCI measures tracks productivity very closely whereas the published LCI is essentially flat or falling when deflated. The paper concludes that real wage rises vary widely from labour productivity increases even over several business cycles. This has implications for wage setting, for the measurement of wage rates and productivity, and for the economic and wage models tested.