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Staff Discussion Paper SeriesAdjusting the Australian wage share for

depreciation, housing, and other factors, 1960-2016

Issue Number: 2

Published Date: 7/03/2018

Authors: Declan Trott and Leo Vance, formerly of the Department of Jobs and Small Business, Workplace Relations Policy Group

Department of Employment Staff Discussion Paper Issue No. – published insert date

Authors acknowledgementThanks to Derek Burnell, Lixin Cai, Greg Connolly, Jonas Fooken, Steven Howe, Gianni La Cava, Melissa Ljubic, Nick Stoney, and seminar participants at the Australian Conference of Economists for helpful comments. Any remaining errors are the authors’.

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Department of Jobs and Small Business Staff Discussion Paper Issue No 2–7 March 2018

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AbstractDepartment of Jobs and Small Business Staff Discussion Paper Series:

Adjusting the Australian wage share for depreciation, housing, and other factors, 1960-2016

We adjust the published Australian wage share series by excluding depreciation and imputed housing rent from total factor income, and using a range of approximations for self-employment, business, and private sector income. In 2015-16, the resulting series were around their long-run averages, with no sign of a long-term decline. The adjustments do, however, generate a more noticeable decline and recovery in the wage share during and after the mining boom.

Authors: Declan Trott and Leo Vance, Workplace Relations Policy GroupIssue Number: 2

Publishing Date: 28/02/2018Key words / themes: factor income distribution, labour share.


Department of Jobs and Small Business Staff Discussion Paper: Issue No. 2

ContentsAuthors acknowledgement................................................................................................2

Disclaimer..........................................................................................................................2

Department of Jobs and Small Business Staff Discussion Paper inquiries............................3

Abstract.............................................................................................................................4

1. Introduction...................................................................................................................6

2. Methodology and Issues.................................................................................................7

Data and Definitions..........................................................................................................................7

Depreciation......................................................................................................................................7

Self-employment...............................................................................................................................8

Housing and public sectors................................................................................................................8

3. Australian estimates.......................................................................................................9

Gross income shares..........................................................................................................................9

Net income shares...........................................................................................................................10

Adjusted net non-housing wage shares...........................................................................................10

Business and private sector net wage shares..................................................................................12

4. Conclusion....................................................................................................................13

References.......................................................................................................................14

Appendix A: Sources and methods...................................................................................15

ABS Data..........................................................................................................................................15

Derived Variables.............................................................................................................................16

Appendix B: Self-employment and mixed income.............................................................17

ABS and international approaches..................................................................................................17

Adjustment factors and implied mixed income shares....................................................................17

Relative capital intensity of mixed income......................................................................................20

Market sector..................................................................................................................................20


1. IntroductionBoth in Australia and overseas, concerns have been raised that the profit (capital) share of income has increased at the expense of the wage (labour) share, or equivalently, that employees have been left out of the benefits of productivity growth (e.g. Cowgill 2013, OECD 2015, IMF 2017). A broader literature has found (and sought explanations for) a declining wage share across developed countries since the 1970s (e.g. Ellis and Smith 2010, OECD 2012, Trott 2013, and Karabarbounis and Nieman 2014a).

Some recent research, however, has questioned this narrative. Bridgman (2014) and Rognlie (2015) argued that the apparent shift in favour of profits has been exaggerated by the rising importance of depreciation and housing in modern economies, and by beginning the analysis in the 1970s when the wage share was at an all-time high. While increases in depreciation and imputed housing income will tend to reduce measured wage shares, they do not represent a true shift of income from employees to employers. Depreciation is not counted as profit or income at a corporate or individual level, while housing is often owner-occupied, its ‘income’ is largely notional imputed rent, and in any case is a separate issue from the labour market. Therefore, wage shares should be calculated net of depreciation, and excluding housing.1 On this basis, Rognlie (2015) found that the net profit shares of private or corporate value added in the US, Japan, France and the UK were in fact higher in the 1950s and/or 1960s than in the 2000s, although this was not true for Canada. Bridgman (2014) found similar results, although his methods are less consistent across the different countries he considers, and do not include any adjustment for self-employment. Neither, however, included estimates for Australia.2 Piketty and Zucman (2014, henceforth PZ) estimated capital and labour shares for Australia net of depreciation, but only to 2011, without excluding housing, and, unlike the rest of the literature, on the basis of national rather than domestic income.

In this paper, we estimate adjusted wage shares for Australia for (financial years ending in) 1960-2016, based on the methods of Rognlie and PZ, with some alterations to deal with Australian data issues. We use three different methods to adjust for self-employment (‘mixed’ or unincorporated business) income: allocating 75% to wages (following PZ), allocating 50% to wages, and excluding the farm sector. In all three cases, net of depreciation and housing, the wage share in Australia was around its historical average at the end of our period. We further estimate wage shares for the business and private sectors, with similar results, using data for general government and public sector wages where available, and proxying with general government consumption before this date. Our overall conclusion is robust to these alternative approaches.

1 La Cava (2016) further explored the rise of the housing share in the US. Karabarbounis and Nieman (2014b) argued that gross labour shares may still be informative for consumption inequality if the economy is not in a steady state. They also argue that net and gross labour shares have shown similar declines since 1975, but do not include data before this.2 An earlier working paper by Rognlie (2014) contained a few preliminary estimates for Australia which appear compatible with our results, although little detail was given.


In section 2 we describe the relevant theoretical concepts and issues, and the barriers to fully implementing Rognlie’s approach with Australian data. In section 3 we present our estimates of Australian wage shares, including proxies for unavailable data. Section 4 concludes. Appendix A gives more detail on sources and methods, and Appendix B discusses the problems with allocating the income of the self-employed between wages and profits based on headcount or hours worked.

2. Methodology and Issues

Data and DefinitionsRognlie (2015) used Piketty and Zucman’s (2014, henceforth PZ) data set for G7 countries. PZ’s database also includes Australia, but with some crucial missing data described below. We use PZ and Rognlie as a guide to create more up-to-date series from the Australian national accounts and other sources. Firstly, however, it is important to introduce some general terms and concepts, based on the Australian national accounts definitions, which will be used throughout.

Total (gross) factor income is GDP less taxes on production and imports. It may be divided into compensation of employees (wages and salaries plus other benefits), gross operating surplus (for corporations, general government, and ownership of dwellings3), and gross mixed income (for unincorporated enterprises, i.e. the self-employed who do not own their own companies).

The simplest wage share measure (used in the ABS national accounts) is compensation of employees divided by total factor income. Similarly, the simplest profit share measure is gross operating surplus of corporations divided by total factor income. More sophisticated versions may adjust for depreciation, focus on specific sectors of the economy, and impute gross mixed income to labour and capital. These three types of adjustment are the focus of the rest of this paper.

DepreciationAdjustment for depreciation is fairly straightforward, in the same way that it is excluded when calculating personal income or corporate profits. Total depreciation in the economy is simply subtracted from gross factor income, to give net factor income. The net wage share is then compensation of employees divided by net factor income. Similar adjustments may be made to the different categories of gross operating surplus and mixed income, using national accounts data.4 By construction, the net wage share must be larger than the gross wage share (equal numerator and smaller denominator). The other net factor shares may be individually higher or lower than their gross equivalents, since depreciation is subtracted from both numerator and denominator, but in aggregate they must be lower to accommodate the rise in the wage share.

If depreciation rises or falls as a share of the economy over time, this adjustment will also change the observed trend in the wage share. Australia is unique among the nine countries in the PZ dataset in that depreciation (as a share of GDP) actually fell slightly between 1960 and 2010. Therefore,

3 Gross operating surplus of government is defined as depreciation of the non-corporate publically owned capital stock, not the budget surplus. Ownership of dwellings is the estimated rental value of the whole housing stock owned by persons, including imputed rent for owner-occupied dwellings. (See ABS 2016, chapter 11.)4 It was suggested to us that similar deductions should be made from wage income to reflect the depreciation of human capital. This is beyond the current scope of the literature or this paper, but may be an interesting avenue for future research.


while Rognlie argues that depreciation is an important driver of falling (gross) wage shares and rising profit shares in G7 countries, this does not apply to Australia over this time period.

Self-employmentMixed income, or the gross operating surplus of unincorporated businesses, reflects partly a return to the labour of the owner – an unobserved or shadow wage – and partly a return on capital. There are several possible approaches to splitting mixed income between labour and capital. Rognlie followed PZ in assuming that the unincorporated business sector has the same factor shares as the corporate sector.

This adjustment is not possible in Australia, since, as noted above, the ABS does not separate corporate and non-corporate compensation of employees in the national accounts. This is unfortunate, since Australia had the highest mixed income share of GDP in the PZ dataset in 1960, and one of the largest declines in this share in the half-century to 2010. Therefore, the imputation of self-employment income is a particularly important issue for Australia. PZ (Appendix, p.138) allocated 75% of net mixed income to labour, and 25% to capital.

Another possible approach is to impute to the self-employed (owner-managers of unincorporated enterprises) the same average income as employees, but this can result in implausible divisions of mixed income. This problem can be mitigated by also using data on capital in the unincorporated business sector, but this is not available for a sufficient time period. These issues are discussed further in Appendix B.

Housing and public sectorsRognlie excludes housing from total factor income, arguing that a rising share of housing in the economy should be seen as a separate phenomenon from the evolution of corporate or business profits. (The housing sector is the mirror image of general government, since it has no compensation of employees.) These statistics are available for Australia, which has experienced a relatively large increase in its housing share of GDP, in contrast to depreciation, since the 1960s. Therefore, excluding housing from total factor income may significantly change the picture of how factor shares evolve.

Rognlie also confined his attention to the private and corporate sectors. Because the gross operating surplus of general government (all of the public sector except public corporations) is equal to depreciation – it does not earn a profit – its net capital income is zero. Therefore, it seems reasonable to also exclude general government compensation of employees and thus confine attention to wages and profits for the profit-making or business sector. Unfortunately, compensation of employees is not available separately for general government, corporations, and unincorporated business in the Australian national accounts. This makes excluding general government or focusing on the corporate sector more difficult, although we make some attempts using proxy data.


3. Australian estimates

Gross income sharesFigure 1 illustrates the evolution of total factor income shares in Australia from (financial years ending) 1960-2016. The ‘Wages’ and ‘Profits’ series correspond to the published ABS wages and profit shares. The ‘Government’, ‘Housing’ and ‘Mixed income’ series are similarly calculated with total (gross) factor income as the denominator, so that the totals sum to 100 per cent. ‘Depreciation’ (for profits, mixed income, government, and housing combined) is also shown with the same denominator.

Figure 1: Shares of total (gross) factor income

Source: See Appendix A: Sources and methods.

The wage share rose from 1960 to the mid-1970s, gave up most of its gains in the 1980s, was fairly stable in the 1990s, fell again in the 2000s, and then recovered. The initial rise in the wage share was mainly at the expense of mixed income, which fell steadily for several decades and then stabilised. Corporations, meanwhile, were squeezed in the mid-1970s, but otherwise increased their share fairly steadily until 2009, after which it has fallen. It is generally acknowledged that the mining boom increased the profits share and decreased the wages share, although there is some dispute about the size of the effect.5 Meanwhile, the housing share grew steadily until the early 1990s, when it also levelled out, although it has begun to rise again in recent years. (Since it is based on imputed rent, it was not directly affected by the more recent rise in house prices.) The general government share was about 2 per cent throughout. Depreciation has also been fairly stable, although there has been a noticeable rise in the last few years, mainly from the mining industry.

5 See e.g. McKissack et al. (2008), Cowgill (2013), Parham (2013), and Fair Work Commission (2016, pp. 41-42).


Net income sharesFigure 2 shows the same factor shares, after deducting the appropriate depreciation figures from both numerator (except for wages) and denominator. This increases the wage share by around 10 percentage points throughout, but does not greatly change the pattern over time. The largest part of this increase is at the expense of corporate profits, although the other shares also fell. The net government share is zero, since it earns no profits after depreciation. The housing and mixed income shares only fall slightly. The recent reversal in the wage and profit shares, however, is slightly more pronounced, reflecting the growth in depreciation following the mining boom – the wage share has risen by about four, rather than two and a half, percentage points since 2009.

Figure 2: Shares of net factor income

Source: See Appendix A.

Adjusted net non-housing wage sharesWhile it is simple to deduct housing from total factor income, dealing with mixed income is more complicated. We have seen that Rognlie and PZ’s preferred method for allocating mixed income is not possible with the available data, while Appendix B shows that adjustment on the basis of the number of self-employed is likely to be highly inaccurate. A simple alternative is to make an arbitrary and fixed division of mixed income between labour and capital. We follow PZ in assuming a 75:25 split, but also employ an alternative 50:50 assumption to test the effect of varying the split on the results. (Since we estimate domestic rather than national income shares, our alternative uses a lower wage and higher profit share than PZ.)

We also calculate wage shares for the non-farm sector. As shown in Figure 3, the decline in gross mixed income is largely a decline in farm income, especially after 1975. If our main concern is to


have a series which is not distorted across time by changes in mixed income, rather than getting the level right at any particular moment, then simply removing farm incomes is a reasonable adjustment, at least after 1970 or so when the non-farm gross mixed income share stabilises. The RBA once published a non-farm wage share series, but it has been discontinued. The components continue to be available in the National Accounts, however.

Figure 3: Farm and non-farm gross mixed income shares of total factor income


Figure 4 shows the estimated wage shares of net non-housing factor income under these three different assumptions, along with their historical averages. In all three series, the housing sector is removed from the denominator, so that only the employing sectors of the economy are included. (The residual from the non-farm wage share should not be interpreted as a pure profit share, unlike the other two series, since non-farm mixed income is not allocated to capital or labour. This also explains why the non-farm wage share is lower than the other two.) Mechanically, the 75:25 split of mixed income gives a higher wage share than the 50:50 split, but the gap narrows over time as mixed income shrinks relative to the economy. Therefore, while the 75:25 split appears more favourable to labour in level terms, it is less favourable in terms of the trend over time. The pre-1975 rise is exaggerated in the non-farm series, since non-farm mixed income was falling during that period. Otherwise, the pattern over time is fairly similar for all three, with the most recent observations almost exactly at their historical averages. Notably, all three show an even stronger recovery since 2009 than the net wage share from Figure 2, with increases of up to six percentage points, mirroring larger declines during the 2000s.

Figure 4: Wage shares of net, non-housing income



Business and private sector net wage sharesFinally, we attempt a rough adjustment for the government sector. Although compensation of employees for general government is not available in the Australian national accounts, a similar series ‘employee expenses’ is available in Government Finance Statistics from 2000 onwards. Before 2000, we use an estimate of 54 per cent of the final consumption expenditure of general government, based on the fairly stable average after this date. Subtracting this series from both numerator and denominator gives a wage share estimate for the business sector (including publically owned corporations).

We use a similar method to estimate wage shares for the private sector. Compensation of employees for the entire public sector (including publically owned corporations as well as general government) is available in the national accounts from 1984 onwards. Before 1984, we use general government consumption expenditure as a proxy, as for the business sector. (Public compensation of employees has been around 60 per cent of general government final consumption since 2000, after falling from about 100 per cent in 1984, presumably as the result of privatisation. We assume that the ratio was also stable before 1984 and apply the 100 per cent ratio back to 1960.) We subtract public compensation of employees from the numerator and denominator, and public non-financial corporation gross operating surplus less depreciation from the denominator, of the estimated net non-housing wage shares. (Depreciation is estimated as 38 per cent of gross operating surplus before 1988, based on the average between 1989 and 2005.) Data on the gross operating surplus and depreciation of public financial corporations is not separated in the national accounts.6

6 Data for private financial corporations is available in the ABS Modeller’s Database (cat. no. 1364.0.15.003), but it is identical to that for all financial corporations in the national accounts.


This omission will bias the level of these shares downward, but this bias would be reduced with the privatisation of the Commonwealth Bank and state banks, thus biasing the trend upwards.

Figure 5: Wage shares of net business and private sector income


Figure 5 shows that the business and private sector series are fairly similar to each other and the non-housing series. The bias mentioned above may be in evidence with the private sector wage shares falling over time relative to the business sector shares. The historical averages are not shown, but in all cases the 2016 values are within a percentage point of the 1960-2016 averages.

4. ConclusionOverall, our results are fairly consistent. Regardless of whether 50 or 75 per cent of mixed income is allocated to labour, or whether the farm sector, general government, or the whole public sector is excluded, our estimated net wage shares, after depreciation and housing, are at about their historical averages. In this regard, the pattern is actually surprisingly close to the unadjusted gross wage share, before any of the issues of mixed income, depreciation, or sectoral coverage are considered. The most striking effect of removing depreciation and housing is to increase the level of the wage share, rather than to change its pattern through time. The adjustments do, however, accentuate the temporary effect of the mining boom in lowering the wage share, and its subsequent recovery.

References


Australian Bureau of Statistics (2016), Australian System of National Accounts: Concepts, Sources and Methods, 2015 (cat. no. 5216.0).

Bridgman, B. (2014) ‘Is Labor’s Loss Capital’s Gain? Gross versus Net Labour Shares’, BEA Working Paper 2014-10.

Cowgill, M. (2013), ‘A Shrinking Slice of the Pie’, ACTU Working Paper 1/2013.

Ellis, L. and K. Smith (2010), ‘The Global Upward Trend in the Profit Share,’ Applied Economics Quarterly 56(3), pp. 231-55.

Fair Work Commission (2016), Decision – Annual Wage Review 2015-16.

International Monetary Fund (2017), ‘Understanding the Downward Trend in Labor Income Shares’, chapter 3 in World Economic Outlook, April 2017.

Karabarbounis, L. and B. Neiman (2014a), ‘The Global Decline of the Labor Share’, Quarterly Journal of Economics 129(1), pp. 61-103.

Karabarbounis, L. and B. Neiman (2014b), ‘Capital Depreciation and Labor Shares Around the World: Measurement and Implications’, NBER Working Paper No. 20606.

La Cava, G. (2016), ‘Housing Prices, Mortgage Interest Rates and the Rising Share of Capital Income in the United States’, RBA Research Discussion Paper 2016-04.

McKissack, A., J. Chang, R. Ewing and Jyoti Rahman (2008), ‘Structural Effects of a Sustained Rise in the Terms of Trade’, Treasury Working Paper 2008-1.

OECD (2012), ‘Labour Losing to Capital: What Explains the Declining Labour Share?’, in OECD Employment Outlook 2012.

OECD (2015), ‘The Labour Share in G20 Economies’, report prepared for the G20 Employment Working Group, Antalya, Turkey, 26-27 February 2015.

Parham, D. (2013), Labour's Share of Growth in Income and Prosperity, Visiting Researcher Paper, Productivity Commission, Canberra.

Piketty, T., and G. Zucman (2014), ‘Capital is Back: Wealth-Income Ratios in Rich Countries, 1700 2010’, Quarterly Journal of Economics, 129(3), pp. 1155-1210. Data and appendix available from http://piketty.pse.ens.fr/en/capitalisback.

Rognlie, M. (2014), ‘A note on Piketty and diminishing returns to capital’, working paper.

Rognlie, M. (2015), ‘Deciphering the rise and fall in the net capital share: accumulation or scarcity’, Brookings Papers on Economic Activity (Spring 2015) pp. 1-54.

Trott, D. (2013), ‘Why has wage inequality risen most where wage shares have fallen least?’, Centre for Economic Policy Research Discussion Paper No. 685.

http://piketty.pse.ens.fr/en/capitalisback


Appendix A: Sources and methods

ABS DataVariable Description Cat. no. Table

CoE Compensation of employees 5204.0 6

GOS_corp Gross operating surplus, corporations 5204.0 6

GOS_gov Gross operating surplus, general government (equal to depreciation, general government)

5204.0 6

GOS_housing Gross operating surplus, dwellings 5204.0 6

GMI Gross mixed income (gross operating surplus, unincorporated enterprises)

5204.0 6

GMI_nonfarm Gross mixed income, non-farm (gross operating surplus, non-farm unincorporated enterprises)

1364.0 14

TFI Total (gross) factor income 5204.0 6

CFC Consumption of fixed capital (depreciation), total (excluding ownership transfer costs)

5204.0 47

CFC_housing Consumption of fixed capital (depreciation), ownership of dwellings 5204.0 47

CFC_mixed Consumption of fixed capital (depreciation), households, other (unincorporated business/mixed income)

5204.0 47

CoE_nonfarm Compensation of employees, non-farm 5204.0 16

CFC_farm Consumption of fixed capital (depreciation), agriculture7 5204.0 50

TFI_farm Agricultural factor income (sum of ‘Compensation of employees, consumption of fixed capital, net property and other income payable’ and ‘Agricultural income’)

5206.0 10

CoE_gov Employee expenses (compensation of employees), general government8

5512.0 939

CoE_public Compensation of employees, public sector9 5206.0 44

GOS_pnf Gross operating surplus, public non-financial corporations 5204.0 6

CFC_pnf Consumption of fixed capital (depreciation), public non-financial corporations10

5512.0 919 & various

Sources: ABS Australian System of National Accounts, 2015-16 (cat. no. 5204.0); Australian National Accounts: National Expenditure, Income and Product, Sep 2016 (cat. no. 5206.0); Government Finance Statistics, Australia (cat. no. 5512.0), various editions; and Modellers' Database, September Qtr 2016 (cat. no. 1364.0.15.003).

7 Before 1990, CFC_farm is estimated as 79% of ‘Consumption of fixed capital’ for Agriculture, Forestry and Fishing (ABS 5204.0, table 47), based on the observed ratio after this date.8 Between 2000-2005, CoE_gov is taken from PZ. Before 2000 and in 2016 it is estimated as 54% of general government final consumption expenditure at current prices (ABS 5204.0, table 2).9 Before 1984, CoE_public is estimated as 100% of general government final consumption expenditure at current prices.10 Before 1988, CFC_pnf is estimated as 38% of GOS_pnf, based on the average from 1989 to 2005.


Derived Variables

Gross income shares (Figures 1 and 3)

Wages CoETFI , Profits

GOScorpTFI

, Mixed income GMITFI , Housing

GOShousingTFI

,

Government GOSgovTFI

, Depreciation CFCNFI , Farm mixed income

GMI−GMInonfarmTFI

,

Non-farm mixed income GMInonfarmTFI

.

Net income shares (Figure 2)Net factor income NFI=TFI−CFC ,

Wages CoENFI , Profits

GOScorp−(CFC−GOSgov−CFChousing−CFCmixed )NFI

,11

Mixed income GMI−CFCmixed

NFI , Housing

GOShousing−CFChousingNFI

.

Net non-housing wage shares (Figure 4)

50% of mixed income CoE+0.5 (GMI−CFCmixed )NFI−(GOShousing−CFChousing)

,

75% of mixed income CoE+0.75 (GMI−CFCmixed )NFI−(GOShousing−CFChousing)

,

Non-farm CoEnonfarm

NFI−(GOShousing−CFChousing)−(TFI farm−CFC farm ) .

Business and private sector net wage shares (Figure 5)

50% of mixed income (business) CoE+0.5 (GMI−CFCmixed )−CoE govNFI−(GOShousing−CFChousing)−CoEgov

,

(private)CoE+0.5 (GMI−CFCmixed )−COE public

NFI−(GOShousing−CFChousing)−(COE public+GOSpnf−CFC pnf ) ,

75% of mixed income (business)CoE+0.75 (GMI−CFCmixed )−CoE govNFI−(GOShousing−CFChousing)−CoEgov

,

(private) CoE+0.75 (GMI – CFCmixed ) –COE public

NFI – (GOShousing – CFChousing )– (COE public+GOSpnf−CFC pnf ) ,

11 Corporate depreciation is calculated by subtracting CFC for all other sectors from the total, instead of summing it for financial and non-financial corporations. This ensures that the sum of depreciation across all sectors excludes ownership transfer costs, in line with PZ. Including ownership transfer costs would slightly increase both total and corporate depreciation, reducing the net profit and increasing the net labour share.


Non-farm (business)CoEnonfarm−CoEgov

NFI−(GOShousing−CFChousing)−(TFI farm−CFC farm )−CoEgov ,

(private) CoEnonfarm−COEpublic

NFI−(GOShousing−CFChousing)−(TFI farm−CFC farm )− (COEpublic+GOS pnf−CFC pnf )

.


Appendix B: Self-employment and mixed incomeThe ABS and international organisations have published several different wage share measures for Australia. Surprisingly, the simplest adjustments (depreciation and the exclusion of housing) are rarely made, while the more problematic mixed income adjustment is more common. The usual method relies on imputing labour income to the self-employed based on the average earnings of employees. Unfortunately, it produces implausible results for the share of mixed income imputed to labour.

ABS and international approachesWhile the headline ABS National Accounts (quarterly and annual, cat. no. 5204.0 and 5206.0) factor shares do not make adjustment for mixed income, the real unit labour costs series does. Conceptually, real unit labour costs – the real wage adjusted for labour productivity – are identical to the wage share, although the implementation is slightly different (ABS 2016, pp. 457-8). Compensation of employees is augmented by payroll tax less employment subsidies, i.e. labour costs which are not received as income by employees. It is then multiplied by the ratio of total hours worked to hours worked by employees, which imputes employees’ average hourly wage to the self-employed. Finally, gross value added rather than gross factor income is used as the denominator. The real unit labour costs series is available from 1985-86.

A more sophisticated method is used in Estimates of Industry Multifactor Productivity (cat. no. 5260.0.55.002). Here, attention is restricted to the market sector of the economy, which excludes housing and several service industries (including all of the general government sector). Estimates are made of both labour and capital income for the self-employed, and mixed income divided accordingly. (See ABS 2015, pp. 436-8.) No adjustment is made for depreciation. These series are only available from 1989-90 for the 12 ‘selected industries’, and from 1993-94 for the 16 ‘market sector’ industries, so are not directly useful for this exercise.

AMECO (the European Commission’s annual macroeconomic database) publishes wage shares for European Union and other countries, including Australia. These are adjusted for self-employment using the headcount ratio of employment to employees. This is similar to the ABS procedure for real unit labour costs, except that it assumes the same annual, rather than hourly, wage for employees and the self-employed. The AMECO wage shares cover the whole economy and no adjustment is made for depreciation. There are versions at factor cost (with factor income as the denominator) and market prices (with GDP as the denominator, therefore smaller). They are available annually from 1960.

The OECD also published labour income shares, but these have been discontinued. They used an hours worked rather than headcount adjustment for self-employment, were available for various sectors as well as the whole economy, and did not adjust for depreciation.

Adjustment factors and implied mixed income shares Using the hours worked or headcount adjustment requires a consistent series separating employees and total employment back to 1960. Critically, the definition of ‘employees’ must match the National Accounts, which includes owner-managers of incorporated enterprises (ABS 2016, p.290). Such data is only available from 1991 in the current ABS Labour Force, Detailed, Quarterly (cat. no.


6291.0.55.003) release. A similar, but not identical series which distinguishes between employees, employers, own account and other family workers, is available back to 1984 in the May 2015 release, roughly matching the availability of the real unit labour cost series. The implied ratios between hours worked by all employed persons and by employees are shown below in Figure B1. Although the older ABS series appears to exclude owner-managers, it matches the new series surprisingly well. The headcount ratio is also shown for comparison. In 1991 it was well below the hours ratio, but is now practically equal. This indicates that the self-employed once worked longer hours than employees, but now work similar hours.

Figure B1: Self-employment adjustment factors (hours worked and headcount)

Sources: ABS 6291.0.55.003, table 13; AMECO12 tables 1.4 and 1.7; OECD.Stat Unit Labour Costs – Annual Indicators,13 Self-employment ratio; RBA Australian Economic Statistics 1949-1950 to 1996-1997,14 table 4.7.

Figure B1 also shows equivalent ratios from other sources. The OECD hours worked ratio only matches their published hours worked series from 1994 onwards (the adjustment factor is a constant 1.17 from 1970-1994, matching the 1994 hours worked figure, while the hours worked series extends back to 1985). AMECO uses a headcount ratio, which is higher than the OECD hours worked ratio both early and late in the series, and drops sharply in 1991. Both the OECD and AMECO series are substantially lower than the equivalent ABS ratios. Finally, RBA Historical Statistics publishes estimates of employment and average hours worked for wage and salary earners and others. The headcount ratios are shown in Figure 3 (the implied total hours worked ratios were far higher, ranging from 1.3 to 1.5). They match the AMECO numbers fairly closely until 1991.

12 http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm13 http://stats.oecd.org/Index.aspx?DataSetCode=ULC_ANN 14 http://www.rba.gov.au/statistics/frequency/occ-paper-8.html

http://www.rba.gov.au/statistics/frequency/occ-paper-8.html

http://stats.oecd.org/Index.aspx?DataSetCode=ULC_ANN

http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm


It is an interesting exercise to calculate the factor shares of gross mixed income implied by these adjustment factors. The potential inaccuracy of the method is immediately apparent in Figure B2: Implied labour shares of gross mixed income. Not only are the implied wage shares of mixed income highly volatile, they are above 100% in many years.15 This is true even of the current ABS series, which is the most consistent with the national accounts definition of employees. There is also a clear timing issue – Figure 1 illustrates the evolution of total factor income shows that the relative decline in gross mixed income was concentrated in the 1960s and ‘70s, while Figure B1 shows self-employment fairly steady in this period and falling afterwards. Mechanically, therefore, this will produce an inverse U-shape for the implied wage share of mixed income. It is not clear whether this reflects a genuine economic phenomenon, measurement error (in mixed income, self-employment or both), or a changing ratio between the average income of employees and the self-employed (i.e. a flaw in the underlying assumption of the adjustment method).

Figure B2: Implied labour shares of gross mixed income

Source: Adjustment factors from Figure B1.

15 The implied wage shares are ( f−1 )CoEGMI

, where f is the ratio of total employment to employees

(headcount or hours worked). PZ note values above 100% as a common issue (Appendix p.41), which is why they prefer to use the corporate sector shares instead. Trott (2013), using AMECO and OECD data, expressed surprise that countries such as France, Japan, and Korea had such large falls in the wage share while wage inequality was stable or falling (in stark contrast to, say, the United States). In light of our present findings, however, these unusually large ‘falls’ in the wage share are likely, at least in part, spurious artefacts of falling self-employment. Between 1975 and 2010, the AMECO self-employment adjustment factor fell from 1.21 to 1.10 in France, from 1.45 to 1.16 in Japan, and from an astounding 2.46 to 1.40 in Korea.


Relative capital intensity of mixed incomeAlthough the national accounts do not include the detailed data on capital rental rates included in Estimates of Industry Multifactor Productivity, we can obtain the capital stock and depreciation for unincorporated enterprises.16 Figure B3 shows the capital stock to income and depreciation to income ratios for unincorporated enterprises relative to the whole economy (figures greater/less than one imply that gross mixed income is more/less capital intensive than total factor income). The results are rather ambiguous. Unincorporated enterprises account for a greater share of depreciation than of the capital stock, whether for genuine economic reasons (they use shorter-lived types of capital) or more lenient/creative accounting. Until recently, the relative capital-income ratio tended to rise over time, while the depreciation-income ratio fell sharply in the 1970s and then stabilised. Both ratios, however, show a trend to relatively lower capital intensity in the unincorporated sector over the last decade (unsurprising, given the large volume of corporate mining investment). While confusing, these results do not support the picture in Figure B2 of rising and then falling labour intensity in the unincorporated sector, except perhaps in the 1970s.

Figure B3: Capital- and depreciation-income ratios, unincorporated relative to total

Source: Capital stocks (K and Kmixed) from ABS 5204.0, tables 57 and 58.

Relative capital-income ratio Kmixed/GMIK /TFI

, relative depreciation-income ratio CFCmixed/GMICFC /TFI

.

Market sectorAs a final exercise, it is interesting to compare the ABS market sector series, with its more sophisticated treatment of mixed income, with our estimates. Our ‘business sector’ (excluding housing and general government) from Figure 5 has fairly similar coverage, although it includes some private sector service industries excluded from the ABS market sector. However, we need to convert our estimates back into gross terms to compare with the ABS estimates. (The opposite

16 The ‘unincorporated’ capital stock also includes non-profit institutions, so is slightly too large. Also, it does not include the unimproved value of land, which is presumably important for the farm sector.


adjustment, subtracting depreciation from the ABS series, would be more difficult, since they are based on unpublished data and include various taxes which our and the national accounts series do not.) This yields the following adjusted gross business sector wage shares :

50% of mixed income CoE+0.5 (GMI−CFCmixed )−COEgovTFI−GOShousing−(COEgov+GOSgov )

,

75% of mixed income CoE+0.75 (GMI –CFCmixed )– COEgovTFI−GOShousing− (COEgov+GOSgov )

,

Non-farm CoEnonfarm−COEpublic

TFI−GOShousing−TFI farm−(COE public+GOSgov ) .

They are shown in Figure B4 alongside the ABS series for the 16 market sector industries, for the available length of that series. The ABS series is very close to the level of our 50:50 series. The evolution over time is fairly similar for all four, although the ABS series does not recover quite as strongly after 2009, rising by only three rather than four percentage points (although this is within rounding error, as the ABS figure is only given to the nearest per cent).

Figure B4: Estimated wage shares of gross business income

Source: ABS 5260.0.55.002 & authors’ calculations.

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