Total Factor Productivity and Wages Policy

Abstract

What role should estimates of growth in total factor productivity play in Australian national wage cases? There currently seem to be two schools of thought on this issue. The Business Council of Australia (and certain others) argue that total factor productivity data should displace the role traditionally filled by estimates of average labour productivity growth. The Australian Council of Trade Unions (ACTU) and the Commonwealth government have argued that total factor productivity data have no substantive role to play in the wage fixing context. The first section of this paper begins by outlining the traditional rationale for seeking to gear wages to average labour productivity growth. This rationale rests crucially on: (a) a competing income claims view of wage and price setting behaviour in the economy; and (b) the assumption, within that approach, that claims are determined in terms of aggregate factor shares, or by reference to the proportionate price mark- up factor implicit in those shares. It is then demonstrated that if this same model is modified so that price mark-ups are computed to secure a particular rate of return on capital employed, and competing income claims are determined by reference to the rate of return on capital, rather than capital's aggregate factor share, then it becomes appropriate to gear wages to total factor productivity growth rather than to average labour productivity growth. The appropriate formula is, however, a multiple of total factor productivity growth rather than 'straight' total factor productivity growth. The multiple is the reciprocal of labour's factor share. The paper then goes on to examine some key design features of the total factor productivity series recently developed and published by the Australian Bureau of Statistics (ABS). This examination is carried out to assess the suitability of the ABS series for use in the defined wages policy context. It is concluded that the methodology adopted in the compilation of the ABS figures is not the most appropriate for this context. The upshot is that were a total factor productivity wages policy rule based directly on the ABS estimates of total factor productivity growth to be implemented, it is uncertain whether it would have the advantages over an average labourproductivity rule, of the types discussed earlier in the paper. The paper concludes by suggesting certain modifications to the ABS series that, it is argued, would provide a total factor productivity indicator with features more appropriate for wages policy debate purposes.