Wage and productivity relationships in Australia and the Netherlands

In this paper, we examine the relationship between real hourly earnings and labour productivity by industry (measured as gross value added per hour) for Australia and the Netherlands. The policies promoting wage moderation in both countries in the 1980s and after were based on the belief that real wage movements had to be aligned to enterprise-level productivity growth for employment growth to be strong enough to solve the persistently high unemployment. The results suggests that productivity movements are only partially being passed on in the form of lower prices and/or higher nominal wage outcomes, so that businesses are using the productivity gains to expand their margins. We examine in detail the extent to which real hourly earnings are reflected in labour productivity growth and if the introduction of the Workplace Relations Act (1996) affected this relationship in Australia. Netherlands is used as a control having avoided any substantial changes in its wage determination system over the period examined.