Source: Stats NZ (national accounts)

The classical economic explanation for labour/capital shares is that they will be set by the marginal product of labour and capital and hence invariant to government policy (apart from the effect of differing tax rates on factors). But once we assume some degree of imperfect competition, there is room for changes in bargaining power to affect the split.

However, the problem with assigning all of the change in labour compensation to bargaining power is that it ignores the fact that the underlying ratio of capital to labour has not been constant. It makes no sense to assume that the compensation share will be constant in the face of changes in the underlying inputs.

Turning to the Statistics NZ productivity data, we see that capital inputs have grown at a much more rapid rate than labour inputs over the period. So ceteris paribis, we would expect that an economy with much more capital per worker would have to pay a greater share of output in rents for that capital.

So why has the labour share risen in the last couple of years? Well, it could reflect the recent surge in labour input over the last couple of years. Or it could reflect a cyclical increase in bargaining power given the low unemployment rate. Or it could reflect a policy-driven structural change in bargaining power. Or it could be random noise (only 2006 and 2007 show any deviation from the trend of the last 12 years).

As a final aside, it should be pointed out that around a third of the drop in labour compensation over the 1981-2007 period reflects higher taxes, not an increase in gross operating surplus (capital share).

CPW