Working Paper: NBER ID: w29548
Authors: Jacob Greenspon; Anna M. Stansbury; Lawrence H. Summers
Abstract: We study the productivity-pay relationship in the United States and Canada along two dimensions. The first is divergence: the degree to which the levels of productivity and pay have diverged. The second is delinkage: the degree to which incremental increases in the rate of productivity growth translate into incremental increases in the rate of growth of pay, holding all else equal. We show that in both countries the pay of typical workers has diverged substantially from average labor productivity over recent decades, driven by both rising labor income inequality and a declining labor share of income. Even as the levels of productivity and pay have grown further apart, we find evidence for some linkage between productivity and pay in both countries: a one percentage point increase in the rate of productivity growth is associated with a positive increase in the rate of pay growth, holding all else equal. This linkage appears stronger in the US than in Canada. Overall, our findings lead us to tentatively conclude that policies or trends which lead to incremental increases in productivity growth, particularly in large relatively closed economies like the USA, will tend to raise middle class incomes. At the same time, other factors orthogonal to productivity growth have been driving productivity and typical pay further apart, emphasizing that much of the evolution in middle class living standards will depend on measures bearing on relative incomes.
Keywords: Productivity; Pay; Income Inequality; Labor Economics
JEL Codes: E24; J24; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rising labor income inequality (J39) | Divergence of pay from productivity (J31) |
| Declining labor share of income (E25) | Divergence of pay from productivity (J31) |
| Policies aimed at increasing productivity (O49) | Benefit typical workers' pay (J31) |
| Productivity growth (O49) | Pay growth (J39) |
| Productivity growth (O49) | Average compensation growth in Canada (O51) |