Follow the money

The shared experience of prolonged pay growth slowdown across countries has lent itself to the notion that there is some common structural cause sitting behind the phenomenon. One oft-cited possibility, explored in this briefing note, is the presence of a ‘decoupling’ between productivity growth and median pay growth that is affecting all advanced economies – in which the gains from economic growth no longer flow smoothly through to the pockets of employees in the middle of the pay distribution in the way they did over the post-WWII decades.

This briefing note unpicks the relationship between productivity and pay growth, looking at a variety of factors that influence pay growth for different groups of employees in the UK – from trends in the labour share to terms of trade movements, and from the role of employer pension contributions to the impact of changes in working patterns. While the relationship is a complicated one, it concludes that the central message from the UK’s decoupling story is a repeat of the one heard multiple times in the post-crisis period: namely that restarting wage growth and supporting household living standards rests above all else on restoring productivity growth to its former levels.