This document summarizes a presentation on the relationship between productivity growth and wage growth in selected OECD countries from 1986 to 2010/2013. It finds that in many countries like the US and Germany, productivity grew faster than median wages, leading to a productivity-wage gap. This gap can be explained by factors like rising inequality between average and median wages, differences between data sources, declining labor shares of income, and changes in labor's terms of trade. Addressing these issues is important for social inclusion and maintaining public support for productivity-enhancing policies.

1. The Productivity-Wage Nexus in
Selected OECD Countries
Andrew Sharpe
Executive Director
Centre of the Study of Living Standards
Presented to the 2016 Conference of the Global Forum on Productivity
Session on Productivity Divergence and Wage Inequality in Lisbon,
July 7-8, 2016
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2. Overview
I. Introduction
II. Analytical Framework
III. Results for Selected OECD Countries
IV. Explanations for the Trends in the
Productivity-Wage Gap
V. Implications for Social Inclusion
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3. Decomposing the Relationship between Labour
Productivity Growth and Median Real Wages
There are two key relationships, each with two underlying components:
1) Productivity (output per hour) and average hourly labour compensation,
mediated by:
• Share of labour income in GDP
• Differences between the producer wage (wage/GDP deflator) and the
consumer wage (wage/CPI)
2) Average hourly labour compensation versus median hourly labour
compensation, mediated by:
• Differences in labour income estimates from national accounts and
household surveys
• Differences in median and average hourly labour income
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4. II. Analytical Framework
• An accounting identity connects consumption
wages and labour productivity:
• By rearranging and differentiating
logarithmically, we obtain:
(1)
(2)
4

5. II. Analytical Framework
• We define the productivity-wage gap as:
• By substituting (3) into (2), we obtain:
• Finally, we define:
(3)
(4)
(5)
(6)
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6. II. Analytical Framework
• By substituting (5) and (6) into (4) we obtain
our decomposition:
(7)
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7. III. Results for OECD Countries
• Results provided generally for the period of 1986
to 2010/13, varying by country depending upon
availability of household survey data from the
Luxembourg Income Study in:
‒ Canada
‒ Denmark
‒ Finland
‒ France
‒ Germany
‒ Ireland
‒ Netherlands
‒ Norway
‒ Spain
‒ United Kingdom
‒ United States
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8. Percentage point contribution
1986-2010
Labour
Productivity
Growth (per
cent per year)
Median Hourly
Real Labour
Income
Growth (per
cent per year)
Productivity-
Wage Gap
(percentage
points per
year)
Inequality
Data
Source
Differences
Labour’s
Terms of
Trade (inverse
contribution)
Labour’s
Share of
Income
(inverse
contribution)
United
States‡
1.63 0.15 1.47 0.52 0.24 0.57 0.16
Germany⁺ 1.39 0.05 1.34 0.38 -0.07 0.59 0.44
France 1.71 0.88 0.83 -0.06 0.71 0.18 0.01
Denmark* 1.61 0.97 0.64 0.01 0.67 0.02 -0.06
Canada* 1.18 0.57 0.62 0.36 0.15 -0.02 0.12
United
Kingdom‡
1.65 1.26 0.39 0.49 0.10 -0.32 0.11
Netherlands 1.27 0.98 0.29 0.09 -0.13 0.06 0.26
Finland† 2.20 2.06 0.14 0.11 -0.22 -0.04 0.29
Spain‡ 1.05 1.29 -0.24 0.23 -0.27 -0.01 -0.18
Norway 1.80 2.09 -0.28 0.22 0.26 -1.16 0.38
Ireland⁺ 3.75 4.11 -0.36 0.88 -2.03 0.20 0.57
*1987-2010; †1987-2013; ⁺1994-2010; ‡1986-2013 8
Summary of Results on the Productivity-Wage Nexus

9. Productivity-Wage Gap, 1986 to 2010/13,
percentage points per year
-0.5
0
0.5
1
1.5
2
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10. Ratio of Average to Median Hourly Real Wage,
2010/13, per cent
80
90
100
110
120
130
140
150
160
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11. Contribution to the Productivity-Wage Gap: Inequality,
1986 to 2010/13, percentage points per year
-0.5
-0.25
0
0.25
0.5
0.75
1
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12. Contribution to the Productivity-Wage Gap:
Data Source Differences, 1986 to 2010/13,
percentage points per year
-1.5
-1
-0.5
0
0.5
1
1.5
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13. Reasons for Data Source Differences
• Household surveys fail to capture top income
earners
• Treatment and potential underestimation of
SLI and fringe benefits by household surveys
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14. Contribution to the Productivity-Wage Gap: Labour’s
Share of Income, 1986 to 2010/13,
percentage points per year
-0.5
-0.25
0
0.25
0.5
0.75
1
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15. Change in Labour’s Share of Income,
1986 to 2010/13, percentage points
-12
-10
-8
-6
-4
-2
0
2
4
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16. Contribution to the Productivity-Wage Gap:
Labour’s terms of trade, 1986 to 2010/13,
percentage points per year
-1.5
-1
-0.5
0
0.5
1
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17. CPI and GDP Deflator Growth, 1986 to 2010/13,
per cent per year
0
1
2
3
4
5
CPI GDP Deflator
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18. IV. Explanation for the Trends in the
Productivity-Wage Gap
• Measurement issues
• Discrepancies between the CPI and GDP
Deflator
– Export Prices
– ICT investment
• Bargaining power changes linked to
– Globalization
– Skill-biased technological change
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19. V. Implications for Societal Inclusion
• There will be less political support for productivity-
enhancing policies if productivity gains are not
equitably shared
• Growing labour market inequality contributed to
increased overall inequality if tax and transfers do not
offset labour market inequality trends
• The incentives for employees to work hard will
diminish if employees believe that they are not
receiving their fair share of productivity gains
• Countries with large gaps between productivity and
wages are less successful in the OECD Living Standards,
especially in the equality component of the index
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