Have Wages Kept Up With Productivity?

Why worker pay seems to have grown more slowly than productivity in many economies, the debate over how to measure the gap, and the falling labour share.

In theory, when workers produce more per hour, their wages should rise. For decades after World War Two, pay and productivity in rich countries did rise together. But from the 1970s, many economists noticed a gap opening.

The gap

In the United States, research by the Economic Policy Institute found that since the 1970s, productivity has grown much faster than the pay of typical workers. Similar, though smaller, gaps appeared in other countries.

The measurement debate

How big the gap is depends on how it is measured:

Total compensation versus wages: benefits such as health insurance have grown, so total compensation grew faster than wages alone.
Average versus median pay: average pay, pulled up by high earners, has tracked productivity more closely than median pay.
Price measures: using different inflation measures changes the result.

Even with adjustments, most economists agree that typical workers’ pay has grown more slowly than productivity.

Another way to see the issue is the labour share: the share of national income going to workers as wages and benefits, rather than to owners of capital as profits and interest. The labour share has fallen in many countries since the 1980s.

Possible reasons

Technology and automation that substitute for workers.
Globalisation, which increased competition from lower-wage countries.
Weaker unions and bargaining power.
Superstar firms with high profits and relatively few workers.
Market power of employers, called monopsony.
Rising housing costs captured by property owners.

India

In India, studies of organised manufacturing show wages growing more slowly than productivity in many periods, with a rising share going to profits. Measurement is complicated by the large informal sector and self-employment.

Why it matters

If productivity gains do not reach workers, inequality rises and living standards for many people stagnate, even as the economy grows.

The more productive factory

A factory installs new machines, and output per worker doubles over a decade. Profits rise sharply, and managers get bonuses. But the wages of machine operators rise only slightly, because there are many workers seeking similar jobs and the union has weakened. Productivity gains flow mostly to owners.

Thinking productivity growth automatically raises everyone's pay

How productivity gains are shared depends on bargaining power, competition and institutions, not just on output.

Key takeaways

In many countries, typical pay has grown more slowly than productivity since the 1970s.
The size of the gap depends on how it is measured.
The labour share of income has fallen in many countries.
Technology, globalisation, weaker unions and market power may explain the gap.