In countries around the world, including Australia, Governments have adopted policies around the ideology of labour market deregulation. Put simply, the view is that a deregulated labour market is good for business because it increases flexibility and reduces cost.

This is what makes the Bank for International Settlements working Paper, The Global Upward Trend in the Profit Share, such interesting reading. Countries examined in the study are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Ireland, Italy, Japan, Korea, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, UK and US. The researchers found that profit share - the proportion of profit relative to GDP - has been increasing steadily around the world and that 2004 was the first year for at least 14 of the countries surveyed were more than two percentage points above their post-1960 average.

But according to the paper, this increase has gone up but it has nothing to do with labor market deregulation. Indeed, the increased profits have come largely through technological innovation. A faster rate of innovation allows for a faster rate of improvement in productivity. At the same time, however, there is a faster rate of obsolescence and depreciation but the smart companies use that to maintain and build their margins.

"The faster rate of innovation makes new capital goods more attractive to firms relative to their existing capital, and so they want to change their capital and and production processes more often than before."

These faster innovation rates create more churn in the labor market which increase the firms' bargaining power.

However, the increased profit share was amplified in countries with more regulated labor markets. Why has this happened? Because when everyone is operating in a deregulated market, the increased margins are competed away. However, the companies that can maintain technological innovation hold on to strong margins with the constant churn and renewal.

"Notwithstanding a couple of obvious outliers, it appears that more regulated labor markets are associated with stronger upward trends in the profit share,'' the paper said. "It might be that the lack of flexibility in the labor market allows firms to capture part of the available rents.''

In other words, according to the paper, the more important drivers for business returns are capital, innovation and to an extent regulation, not cheap labor which is plentiful and available to all comers.