Cordeiro De Noronha Pessoa, Joao Paulo and Van Reenen, John 
ORCID: 0000-0001-9153-2907
(2013)
Decoupling of wage growth and productivity growth? Myth and reality.
CEP Discussion Papers (CEPDP1246).
London School of Economics and Political Science. Centre for Economic Performance, London, UK.
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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.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | https://cep.lse.ac.uk/_new/publications/discussion... |
| Additional Information: | © 2013 The Author(s) |
| Divisions: | Centre for Economic Performance Economics |
| Subjects: | H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor |
| JEL classification: | E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation) J - Labor and Demographic Economics > J2 - Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital; Retirement > J20 - General J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General |
| Date Deposited: | 22 Feb 2024 10:57 |
| Last Modified: | 01 Nov 2024 05:00 |
| URI: | http://eprints.lse.ac.uk/id/eprint/121790 |
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