Productivity and Pay: Is the Link Broken?
66 Pages Posted: 3 Jan 2018
Date Written: December 2017
Since 1973 median compensation has diverged starkly from average labor productivity. Since 2000, average compensation has also begun to diverge from labor productivity. These divergences lead to the question: to what extent does productivity growth translate into compensation growth for typical American workers? We investigate this, regressing median, average and production/nonsupervisory compensation growth on productivity growth in various specifications. We find substantial evidence of linkage between productivity and compensation: over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth and with 0.4 to 0.7 percentage points higher production/nonsupervisory compensation growth. These results suggest that other factors orthogonal to productivity have been acting to suppress typical compensation even as productivity growth has been acting to raise it. Several theories of the cause of the productivity-compensation divergence focus on technological progress. These theories have a testable implication: periods of higher productivity growth should be associated with periods of faster productivity-pay divergence. We do not find substantial evidence of co-movement between productivity growth and the labor share or mean/median compensation ratio. This tends not to provide strong support for pure technology-based theories of the productivity-compensation divergence.
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