Economic growth

A recovery for all? The evolution of the relationship between economic growth and pay before, during and since the financial crisis

Matthew Whittaker
Matthew Whittaker

In this note, we use the latest wage and National Accounts data to consider how the ‘wedge’ between productivity growth and median pay growth that arose prior to the financial crisis in the UK – and which appears to have become a feature across a range of advanced economies in recent decades – has developed in the period since 2007.

Key findings

  • Over the full period (1983-2014) a 23 percentage point ‘wedge’ has opened up between productivity growth and median pay growth. Widening pay inequality accounts for around 71 per cent of the effect, with the deflator effect accounting for a further 28 per cent. Unlike in many other advanced economies, a shift in the labour share has played a relatively minor role accounting for around 9 per cent of the overall ‘wedge’. The compensation effect has served to narrow the gap between productivity and pay over the period as a whole, but has been a key driver of decoupling since the turn of the century.
  • The five years from 2002 to 2007 accounted for just under 7 percentage points of the overall 23 percentage point gap that opened up after 1983.Of this, around two-thirds (63 per cent) was accounted for by the compensation effect and around two-fifths (41 per cent) was due to the wage distribution effect. The labour share effect accounted for just under one-fifth (18 per cent) of the total – a relatively small, but non-trivial contribution. The deflator effect acted to narrow the gap between productivity and median pay (contributing -23 per cent to the overall movement).
  • Looking specifically at the exceptional period since the financial crisis, we find that the productivity/median pay ‘wedge’ has continued to widen – with pay falling as productivity growth has stalled. Of the 23 percentage point gap identified over the longer period, roughly 8.5 percentage points appeared after 2007. Of this, around two-thirds (64 per cent) was accounted for by the deflator effect and around one-third (32 per cent) was due to the compensation effect. Pay inequality has been much less pronounced in this period.

Further reading

Decent exposure
An overview of how Britain’s exposure to trade has changed
·
Sophie Hale
Local roots of trade routes
The UK’s regional services trade over time
·
Emily Fry, Will Barlow
Talking trade-offs
Deliberations on a higher-productivity future in the Birmingham and Greater Manchester urban areas
·
Tania Burchardt, Tara Goatley, Lindsay Judge
Matthew Whittaker
Matthew Whittaker