Explaining the Gap between Productivity and Median Wage Growth in Canada, 1976-2014

Canadian labour is more productive than ever before, but there is a pervasive sense among Canadians that the living standards of the 'middle class' have been stagnating. Indeed, between 1976 and 2014, median real hourly earnings grew by only 0.09 per cent per year, compared to labour productivity growth of 1.12 per cent per year. We decompose this 1.03 percentage-point growth gap into four components: rising earnings inequality; changes in employer contributions to social insurance programs; rising relative prices for consumer goods; and a decline in labour's share of aggregate income. Our main result is that rising earnings inequality accounts for half the 1.03 percentage-point gap, with a decline in labour's income share and a deterioration of labour's purchasing power accounting for the remaining half. Further analysis of the inequality component reveals that real wage growth in recent decades has been fastest at the top and at the bottom of the earnings distribution, with relative stagnation in the middle. Our findings are consistent with a 'hollowing out of the middle' story, rather than a 'super-rich pulling away from everyone else' story.