Labor and unions have used the argument to claim the workplace system has broken and support calls for a return to centralised wage fixing or industry-wide bargaining.
While accepting employees’ earnings have lagged productivity in the past five years, Mr Kirchner argued the long-term relationship remains intact.
He said that when calculating real wage growth using producer prices rather than consumer prices, compensation tracks productivity more closely.
He calculated that a 1 per cent increase in labour productivity raised employees’ real compensation by between 0.7 per cent and 0.9 per cent since the introduction of enterprise bargaining in the 1990s.
“Raising productivity growth is still the best way to improve average workers’ incomes,” he said.
The paper argued claims of a “decoupling” use “the wrong measure” by comparing productivity to median earnings, which reflect distribution of productivity gains, rather than average earnings, which reflect productivity growth.
“A robust compensation-productivity nexus does not preclude problems with the distribution of productivity gains and growing income inequality,” he said.
He warned this confusion could lead to too much focus on redistribution – “a second order issue” – rather than productivity growth, and result in non-market approaches to wages that in the past have lowered productivity and broke the productivity-compensation link.
Focus on housing not bargaining power
The long-term decline in labour’s share of income can also be explained as “a consequence of the relatively greater volatility of the capital share and not changes in workers’ bargaining power”, Mr Kirchner finds.
He attributes labour’s decline to rising housing prices, whose share of total income has risen from 2.4 per cent in 1960 to 8.2 per cent.
“The role of housing in driving the increase in the overall capital share suggests that those concerned about income inequality should focus on improving the supply of housing rather than the bargaining power of workers.”
He concluded that employee compensation still enjoys a “robust relationship” with GDP growth, “which gives the Reserve Bank considerable leverage over nominal wages growth if it chooses to exercise it”.
“The RBA can lift nominal wages growth by credibly committing to return inflation to the middle of its 2-3 per cent target range,” he said.
“Waiting for the labour market to tighten sufficiently to raise wages in the hope that this might flow through to inflation gets the relationship between wages and inflation backwards.”
‘Not natural result of market forces’
However, Centre for Future Work economist Jim Stanford, who was one of 124 labour policy experts who signed an open letter this week backing policies on stronger wage growth, said even on Mr Kirchner’s own data real wages had been flat or declining compared to productivity.
“Since 2000, productivity has grown about 30 per cent, and real wages about half that much (and not at all over the past 5 years),” he said.
He disputed that the housing bubble explained the long-term fall in labour’s share of income, saying “almost all of the GDP share that workers have lost has shown up in expanded profits for corporations”.
“It is a sustained redistribution of income from workers to owners and employers,” he said.
“This is not a natural result of market forces. It is not a short-term effect of the housing bubble. It is an established 40-year trend. And it is clearly the result of changes in the institutional and structural balance of power in the economy.”