Productivity and Pay: Is the Link Broken?

Since 1973 median compensation in the United States 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: Holding all else equal, to what extent does productivity growth translate into compensation growth for typical American workers? The authors investigate this question by regressing median, average, and production/nonsupervisory compensation growth on productivity growth in various specifications. They 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 point higher median and average compensation growth and with 0.4 to 0.7 percentage point 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 this 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. Testing this over the postwar period in the United States, the authors do not find substantial evidence of co-movement between productivity growth and either the labor share or the mean/median compensation ratio. This tends to militate against pure technology-based theories of the productivity-compensation divergence. Together these results suggest that faster future productivity growth is likely to boost median and average compensation growth close to one-for-one.