Productivity growth is supposed to be the key to boosting wages and living standards in the economy. However, just as housing price growth decoupled from wage growth in recent decades, new research shows that real wages have not kept up with productivity growth.

So, who is getting the benefit?

Firstly, it’s important to understand productivity. Productivity is getting more output from the same number of inputs, or the same output from a reduced number of inputs. For example, if workers are producing thingamajigs a new innovative way and now make more thingamajigs with the same hours of work, then productivity goes up.

This increase in thingamajigs is sold, and then that the extra money made is then supposed to flow to workers in higher living standards. Productivity has been described as “the engine of living standards”, and the Productivity Commission says the more productive the economy is, the more workers are supposed to enjoy either higher wages, lower prices, or by working less and having more free time.

The Productivity Commission claims that outside of mining and agriculture, productivity has been flowing to higher real wages. But there is new evidence that the Productivity Commission is wrong.

The Centre for Policy Development (CPD) has released new research showing that for the past 30 years, typical worker’s pay has not kept pace with productivity. This is consistent with Australia Institute research, which shows that over the 10 years from 2012 to 2022, productivity grew 11 per cent while real wages remained flat.

The CPD research further shows that not only have wages decoupled from productivity growth, just as housing prices have decoupled from wages in recent decades, but the gaps have been widest where productivity growth has been strongest. For example, the information media and telecommunications industry experienced the highest productivity growth in the last decade, but wages in that industry only increased at a small fraction of that.

So, who is getting the benefits of productivity growth? You guessed it. Instead of flowing to workers as higher wages, business is capturing the gains from productivity growth as profit.

Economist Jim Stanford put it this way: “The fruits of productivity growth have been disproportionately captured in the form of business profits, dividend payouts, and executive compensation.”

While the Productivity Commission regularly releases reports and press releases encouraging the government to cut the company tax rate to boost productivity, the commission is strategically silent when it comes the need for business to pass on the benefits of productivity growth by increasing wages for workers. Funny that.

It is not the first time important public institutions have refused to believe that the economic system is delivering big profits to corporations, it is not working for most Australians.

When inflation spiked in 2022 the Reserve Bank worried that higher wages were driving this inflation, and there were dire warnings of a wage-price spiral. The RBA hiked interest rates dramatically in a short space of time. But research from the Australia Institute showed that it was actually excessive corporate profits that were driving post-Covid inflation, consistent with research from the OECD, led by former Coalition Finance Minister Mathias Cormann.

Businesses were putting up their prices by more than their cost increases and pocketing the extra money as higher profits. Essentially, the price of everything you bought went up and so did business profits, but your income didn’t rise at the same rate. Once again, unchecked corporate greed saw business reaping the benefits of growth while ordinary workers were getting left behind.

But the Reserve Bank refused to accept this. The RBA claimed that profits were only higher because of the mining industry. This missed the point that higher resources costs pushed up fuel and electricity prices that added to inflation. But further Australia Institute research showed that while mining profits had increased the most, non-mining industries profits were higher too.

Productivity and the profit-price spiral are examples of flawed understandings of how the Australian economy actually works in the real world.

Both the Productivity Commission and the Reserve Bank believe that businesses operate in highly competitive markets. That businesses have no choice but to pass on productivity improvements to workers as higher real wages – after all, that’s what the textbooks says will happen. These businesses couldn’t possibly increase their prices by more than their costs because their competitors wouldn’t, so they would lose sales to their cheaper competitors.

But in reality, the Australian economy is dominated by a few large companies with enormous market share and enormous market power, like the big four banks, the big mining companies, the big four consulting firms, the big two airlines, the big two telcos and the big two supermarkets.

In reality, the Productivity Commission talks up cutting company taxes to boost productivity growth, but rarely talks about the strong evidence that inequality is harmful to economic growth, or that higher wage growth can help increase labour productivity growth.

In reality, as Richard Denniss and David Richardson, wrote in a submission to the Senate committee on productivity: “Australia’s history shows a decline in productivity growth despite a history of lowering tax rates on incomes, on goods and services, on capital gains, without any noticeable improvement in productivity growth.”

Nor do we hear much about how rising global temperatures will reduce the productivity of, for example, the global agriculture industry, by wiping out while crops destroyed by storms, floods or drought each year. Or, how AUKUS spending will be uniquely harmful to Australian productivity growth-Australia has already spent $6.6 billion helping both the US and UK develop their countries submarine production capacity.

Australia’s productivity debate is narrow and stale and that is unlikely to change while it’s led by the likes of the Productivity Commission. Perhaps a better question for the Commission to consider would be: what’s the point in increasing productivity if ordinary Australians continue to be locked out of the benefits?

This article originally appeared in The Canberra Times.