Productivity must now be focus: report

THE declining terms of trade means there must be a focus on productivity growth if wages growth is to be sustained, new research shows.

The study by the Productivity Commission found a large rise in the terms of trade in the 2000s brought stronger national income than in the "productivity decade" of the 1990s.

Even so, labour income as a share of national income fell by four percentage points in the 2000s because income growth from capital or business assets accelerated even faster.

But slower growth in consumer prices meant the real value of each dollar earned was worth more in terms of purchasing power, meaning people were no worse off.

"The purchasing power effect more than outweighed the apparent reduction in labour's share of national income," the commission says.

It says the mining boom was overwhelmingly responsible for the fall in labour's share of income as mines were developed, leading to more capital intensive production overall.

Higher output prices from minerals and construction reduced the real cost of labour so that growth in real wages fell behind labour productivity growth.

"As the terms of trade now decline, the labour income share will rise," the commission says.

"But with a more capital-intensive economy, the share is unlikely to revert fully to previous levels."

But it warns trying to restore labour income share through wage rises would probably only have adverse consequences for employment and inflation and for industries already facing adjustment pressures.

"With the prospect of declining terms of trade, a focus on productivity growth will be the way to sustain growth in real wages," it says.

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