Some inconvenient facts for the ‘Australian Income Shares’ story

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Thanks to repeated campaigning and the echo-chamber that is modern social media, a few myths about the Australian workforce seem to have become widely accepted in the public consciousness as if they were “facts”.

One of these has been that “casualisation is increasing in the Australian workforce”. The ‘casualisation’ myth keeps being reported in the media, despite being repeatedly contradicted by national data published by the ABS and the Fair Work Commission and being “fact-checked” and confirmed as wrong in 2016 by the University-based Conversation: Casualisation Fact Check.

More recently, the idea that Australian workers are receiving a ‘record low’ or ‘unfair’ share of total national income has been gaining traction. Like the ‘casualisation’ story, this assertion is not borne out in the national data, as published by the ABS.

Remarkably slow growth in nominal wages and incomes in recent years (due to a number of factors such as low background inflation, low productivity growth and ongoing spare capacity in the labour market) has sparked renewed interest in the shares of national income that go to capital and labour in Australia. This has generated some useful new discussion about income sources and shares, but it is also generating some new mythmaking. So it is worth exploring anew what the national income data actually tell us. In particular, do they support the story about a declining share of national income going to “working families” or the related story about worsening income inequality?

The most commonly cited Australian data source for examining changes in the shares of national income derived from (and going to) capital and labour is ‘total factor income’, which is calculated by the ABS as part of its National Accounts each quarter (the same data publication that gives us GDP and many other useful headline measures of economic performance).

Total factor income is an estimate of the gross income derived from each ‘factor of production’, including labour and capital. These data are available on a consistent basis from September 1959 to the current quarter (June 2017). They tell us the shares of national income derived from (or paid to):

  • Employees (pre-tax wages, salaries, bonuses, redundancies, superannuation payments and all other pre-tax payments to employees for work done during the relevant accounting period);
  • Private sector non-financial corporations (gross operating surplus or pre-tax profits earned by all private sector corporations that are not in the financial sector);
  • Public sector non-financial corporations (gross operating surplus or pre-tax profits earned by all public sector corporations that are not in the financial sector);
  • Financial corporations (gross operating surplus or pre-tax profits earned by corporations such as banks, insurance companies and superannuation funds that are mainly engaged in “borrowing and lending money, providing superannuation, life, health or other insurance, financial leasing or investing in financial assets. Also included are corporations providing financial auxiliary services”);
  • General government operating surplus; and
  • Dwelling owned by persons (rental income earned by individuals who own residential property).

Most of the commentary about these data focuses on the shares of income going to just two of these categories: ‘employees’ and ‘corporations’ (all of or just private sector corporations). However, that is not the whole story, nor possibly even the most interesting story.

Chart 1: Share of total factor income in Australia, 1960 to 2017

Chart1

Data source: ABS National Accounts, June quarter 2017

The share of Australia’s total factor income going to labour has averaged 55.0% since 1959. It reached a record high of 62.7% in March 1975 and a record low of 49.9% in September 1963. Its lowest point in this century was 51.4% in March 2017 and its latest point was 51.9% in June 2017 (see chart 1 above). The reasons for these highs and lows are varied:

  • The high point of 62.7% in 1975 coincided with unusual national wage decisions at that time, as well as the global oil price shocks that disrupted economic activity, employment and profits in Australia and around the globe;
  • A second high spike of 61.8% in 1982 coincided with the beginning of a severe recession in Australia, with the national unemployment rate rising rapidly above 10% by 1983. In response, the Hawke Government introduced sweeping changes to Australia’s national wage-setting, taxation and welfare systems, collectively known as the ‘prices and incomes accord’;
  • The low point of 49.9% in 1963 coincided with a temporary rise in income derived from both public and private sector non-financial corporations. At the time, public-sector corporations contributed a higher share of income (around 3%) than they do today (around 1%), while financial corporations contributed a much lower share (around 1% in 1963 compared to around 6% today), as did private sector non-financial corporations (around 15-16% in 1963 compared to 19-20% today);
  • Separate ABS data on corporate gross operating profits (published each quarter in Business Indicators) confirm that the most recent lows in employee income shares are related to temporary surges in mining company profits (see chart 2). These temporary spikes in mining company profits added to the total income earned by private-sector non-financial corporations and by Australia in total in the quarters in which they occurred. So, mathematically, they pushed down the shares of income being earned by all other sources. But they did not occur at the expense of other forms of income, or cause them to fall. That is, these temporary mining company profit surges did not correlate with (let alone cause) a drop in income for employees. Arguably, however, the commodity price spikes from which mining companies benefited so greatly during 2012-15 pushed the Australian dollar to very high levels and led to an indirect ‘Dutch Disease’ effect, to the detriment of profits in other exporting industries. Reflecting this, profits earned by private-sector non-financial corporations in other industries were far more subdued over this period (see chart 2).

Chart 2: Corporate gross operating profits, by major industry, 1995 to 2017

Data source: ABS Business Indicators, June quarter 2017.

Data source: ABS Business Indicators, June quarter 2017

A second – and potentially more interesting – national income story relates to the smaller income sources that tend to be overlooked by the traditional ‘wages versus profits’ dichotomy. In short, there are other smaller sources of income that have been quietly growing as a share of national income over a very long period of time, to the point where they are now reasonably significant as a ‘third source’ of income for many Australian households, in addition to their existing income derived from wages or profits. These smaller – but growing – income sources for many households are:

  • Earnings derived from financial corporations including banks, insurance and superannuation entities, the dividends and payouts from which go to households directly or (eventually) through superannuation earnings. Only 1.2% of total factor income came from this source in the 1960s, compared to 6.2% today. This is related to the rising size of banking and finance as a share of our economy (from about 4% of national output in the early 1970s to 9% today), but also to the rise of compulsory superannuation as a way of organising our collective lifetime income; and
  • Profits earned by individuals from residential property, including rental income paid to individual property owners (but excluding rent earned by corporate property owners). This has slowly risen from 2.7% at the beginning of the 1960s to 9% in 2016 and 8.9% today (as of June 2017).

So together, these two sources of income have grown from under 4% in the 1960s – and just 6% in 1975 – to more than 15% today. This is a decent chunk of total national income, much of which flows into households in the form of rent and (eventually, upon retirement from the workforce) superannuation earnings. It is additional to the labour income that is the sole income source counted in the traditional ‘wages versus profits’ income dichotomy. As our population ages, these income sources will probably become even more prominent for households and as a share of national income.

In conclusion, therefore, the story about a falling income share for “working families” is nowhere near as clear cut as its proponents make out. Australia is considerably more complex than it was in the days when the old ‘capital versus labour’ dichotomy was last in vogue. Today we also need to take into account the rising share of household income being derived from property investment and, later in life, from superannuation (neither of which are included in “Total Compensation of Employees”) and of course the growing proportion of non-wage-earning households associated with the ageing of the population.

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Julie Toth
Julie is Ai Group’s Chief Economist, producing economics research, comment and policy for Ai Group and its members. She has over two decades of experience in Australian public policy and economics research, working across the public and private sectors. Prior to joining Ai Group, Julie held senior economics roles with the ANZ Banking Group, the Productivity Commission and other Federal Government agencies.

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