Advanced Search
MyIDEAS: Login to save this paper or follow this series

Decoupling of Wage Growth and Productivity Growth? Myth and Reality

Contents:

Author Info

  • Joao Paulo Pessoa
  • John Van Reenen

Abstract

It is widely believed that in the US wage growth has fallen massively behind productivity growth. Recently, it has also been suggested that the UK is starting to follow the same path. Analysts point to the much faster growth of GDP per hour than median wages. We distinguish between "net decoupling" - the difference in growth of GDP per hour deflated by the GDP deflator and average compensation deflated by the same index - and "gross decoupling" - the difference in growth of GDP per hour deflated by the GDP deflator and median wages deflated by a measure of consumer price inflation. We would expect that over the long-run real compensation growth deflated by the producer price (the labour costs that employers face) should track real labour productivity growth (value added per hour), so net decoupling should only occur if labour's share falls as a proportion of gross GDP, something that rarely happens over sustained periods. We show that over the past 40 years that there is almost no net decoupling in the UK, although there is evidence of substantial gross decoupling in the US and, to a lesser extent, in the UK. This difference between gross and net decoupling can be accounted for essentially three factors (i) compensation inequality (which means the average compensation is growing faster than the median compensation), (ii) the wedge between compensation (which includes employer-provided benefits like pensions and health insurance) and wages which do not and (iii) differences in the GDP deflator and the consumer price deflator (i.e. producer wages and consumption wages). These three factors explain basically ALL of the gross decoupling leaving only a small amount of "net decoupling". The first two factors are important in both countries, whereas the difference in price deflators is only important in the US.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://cep.lse.ac.uk/pubs/download/dp1246.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1246.

as in new window
Length:
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:cep:cepdps:dp1246

Contact details of provider:
Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: Decoupling; Wages; Productivity; Compensation; Labour Income Share.;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(3), pages 879-907, August.
  2. Dew-Becker, Ian & Gordon, Robert J, 2005. "Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5419, C.E.P.R. Discussion Papers.
  3. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(2), pages 458-474, April.
  4. Alan Krueger, 1999. "Measuring Labor's Share," NBER Working Papers 7006, National Bureau of Economic Research, Inc.
  5. Dean Baker, 2007. "The Productivity to Paycheck Gap: What the Data Show," CEPR Reports and Issue Briefs, Center for Economic and Policy Research (CEPR) 2007-11, Center for Economic and Policy Research (CEPR).
  6. Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 67-150.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Barnett, Alina & Batten, Sandra & Chiu, Adrian & Franklin, Jeremy & Sebastia-Barriel, Maria, 2014. "The UK productivity puzzle," Bank of England Quarterly Bulletin, Bank of England, Bank of England, vol. 54(2), pages 114-128.
  2. Dan Corry & Anna Valero & John Van Reenen, 2011. "UK economic performance since 1997: growth, productivity and jobs," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 47521, London School of Economics and Political Science, LSE Library.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp1246. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.