Productivity and Pay: Is the link broken?
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.
Thanks to Jared Bernstein, Josh Bivens, John Coglianese, Jason Furman, Larry Katz, Robert Lawrence, Eben Lazarus, Larry Mishel, Adam Posen, Jaana Remes, Jim Stock and Jeromin Zettelmeyer for comments, as well as to the participants at the Peterson Institute for International Economics conference in November 2017 and pre-conference in July 2017. Thanks also to Philipp Schellhaas for excellent research assistance. Presented at the Peterson Institute for International Economics conference on “The Policy Implications of Sustained Low Productivity Growth”, November 9th 2017. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.