For decades, economists and policymakers have worried about the declining share of national income going to workers. From the mid-1990s until just before the pandemic, the labour share in Australia steadily fell, tracking a global trend that raised concerns about inequality, wage stagnation and the growing power of capital.
But in the past few years, the story has shifted. The labour share of income in Australia has been rising. And in one of the economy’s most important industries – construction – the rise has been both striking and sustained.
Today, the labour share in construction is higher than the market sector average. This is not just a cyclical blip caused by COVID. In fact, this has not happened since at least the 1990s. It points to deeper structural forces at work in the sector, with implications for housing costs, infrastructure delivery, and productivity.
The labour share can be decomposed into two factors:
- Real wages: the purchasing power of worker pay; and
- Labour productivity: the amount of output produced per hour worked.
A rising labour share can mean workers are winning a bigger slice of the pie through higher wages, or that productivity is stagnating. In construction, the story is the latter.
Real wages in the construction sector have been broadly stagnant since the mining boom and bust. But labour productivity in construction has been weak, particularly over the past decade. The result is a growing wedge between wages and productivity: workers’ pay is not racing ahead, but output per worker has been lacklustre such that labour’s share of income has climbed.
The observation that construction productivity growth is weak is not new. Australia’s construction productivity problem has been the subject of repeated reviews and inquiries, from state treasuries to industry bodies. The Productivity Commission recently highlighted the housing construction sector’s weak efficiency and slow adoption of innovation. But what has received less attention is how changes in productivity interact with the income distribution: productivity weakness has directly fed into a higher labour share.
So, what is driving this? There are at least two parts to the story.
The first is cyclical and post-COVID. Pandemic disruptions, border closures, and supply chain bottlenecks put upward pressure on costs and made it challenging for construction firms to finish projects on time. Even as demand surged for housing and infrastructure, productivity fell, and labour costs weighed more heavily in the sector’s income mix.
But the second story is longer-term and arguably more important. After the mining boom faded, construction was left with a cost overhang that looked like a classic case of Baumol’s cost disease: labour-intensive industries that struggle to achieve productivity gains see costs rising relative to other parts of the economy. In this environment, labour’s share rises, not because workers are reaping large gains but because output is failing to keep pace.
We can see this clearly in the state-level data. The construction sector labour share has been rising strongly in the states and territories linked to the resource sector – Western Australia, Queensland and the Northern Territory. Consistent with the “mining overhang” narrative, this is due to the high growth in real wages relative to productivity.
The construction sector’s unusual labour share dynamics are a reminder that income distribution statistics don’t always tell a simple “workers vs capitalists” story. Workers are getting a bigger slice of the pie in construction, but the pie itself is barely growing.
This nuance matters for the national productivity debate. If policymakers want to sustain higher wages, improve affordability, and deliver infrastructure efficiently, the focus cannot just be on lifting the labour share. It must be on lifting productivity, particularly in sectors like construction that play an outsized role in shaping economic outcomes.
Policymakers should be cautious, too, about assuming that rising labour shares mark the end of a long decline in worker bargaining power. In construction, at least, the rise appears to be more about other factors, like cost discipline, than it is about newfound worker bargaining power.
Future e61 research will undertake firm-level analysis to shed further light on regional and sectoral differences in real wages, labour productivity and the labour share of income. This speaks not just to the health of the construction industry but to the broader trajectory of Australia’s economy.
