Does Productivity Growth Lead To Wage Growth? 'Not Really, No'

by: Hale Stewart

By New Deal Democrat

I've seen a few articles recently claiming that low wage growth is because productivity by workers has been stalling - a convenient way to absolve the oligarchy.

Except, if the theory were true, we should see bigger wage gains in the sectors of the economy with the most productivity growth.

Well, some British researchers studied that, and here is what they found:

Does productivity growth help predict wage growth at an industry level? Not really, no. The distribution of productivity growth across industries is positively correlated with subsequent wage growth - industries with higher productivity growth now will tend to have higher wage growth in subsequent quarters. However, productivity growth has little additional value in predicting wage growth over and above univariate models....

The real conclusion is buried in the prior discussion:

These correlations may also tell us something about how an increase in productivity in a particular industry feeds through into real wages. Rather than bidding up relative nominal wages (and therefore, the relative RCW in that industry), an increase in productivity leads to lower relative prices for the output of that industry, increasing RPW for given nominal wage. This boosts the real consumption wages of workers in all industries.

So, productivity gains lead to a deceleration in consumer inflation, *not* better nominal wage growth.

Oops!

Ultimately, wage growth isn't about productivity. It's about bargaining power. And bargaining power is the biggest blind spot of most macroeconomic theory.