{"id":24340,"date":"2025-12-02T16:57:41","date_gmt":"2025-12-02T16:57:41","guid":{"rendered":"https:\/\/www.adzuna.co.uk\/blog\/?p=24340"},"modified":"2025-12-03T16:23:52","modified_gmt":"2025-12-03T16:23:52","slug":"rethinking-the-productivity-pay-relationship-implications-for-innovation-policy","status":"publish","type":"post","link":"https:\/\/www.adzuna.co.uk\/blog\/rethinking-the-productivity-pay-relationship-implications-for-innovation-policy\/","title":{"rendered":"Rethinking the productivity\u2013pay relationship: Implications for innovation policy"},"content":{"rendered":"

By Nick Litsardopoulos, Research Economist, IES.<\/b><\/em><\/p>\n

The<\/span> 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel <\/span><\/a>was recently awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt \u201cfor having explained innovation\u2013driven economic growth.\u201d Their work continues a long tradition, beginning with Schumpeter\u2019s \u201cgale of creative destruction\u201d, recognising technological innovation as a transformative force that raises demand for new products, services, and skills while rendering others obsolete. Despite short\u2013term disruptions, few dispute that technological progress has improved long\u2013run human welfare.<\/span><\/p>\n

Yet, prominent thinkers such as <\/span>Carl Benedikt Frey<\/span><\/a> and <\/span>Martin Ford<\/span><\/a> have voiced concerns about how the benefits of technological progress are shared. Central to these concerns is a widely circulated chart showing that, since the mid\u20131970s, measured labour productivity in the United States has risen substantially, while real hourly compensation for typical workers has stagnated. The version of this chart reproduced below illustrates this now\u2013familiar divergence.<\/span><\/p>\n

\"\"\"\"<\/p>\n

Figure 1. Productivity growth and hourly compensation growth, 1948\u20132024<\/b>
\n<\/b>(Source: U.S. <\/span><\/i>BLS<\/span><\/i><\/a> via FRED)<\/span><\/i><\/p>\n

This \u201cproductivity\u2013pay gap\u201d has become a touchstone in debates on automation, inequality, and labour policy.<\/span><\/p>\n

Technological progress should, in theory, accelerate productivity growth and thereby raise incomes. Indeed, <\/span>productivity analyses<\/span><\/a> suggest that without productivity growth, workers’ pay would have been even lower. However, <\/span>a divergence has appeared<\/span><\/a>, that is, the average compensation has continued to track productivity fairly closely, while nonsupervisory wages have lagged significantly. This decoupling has shaped decades of policy debates premised on the expectation that productivity and pay <\/span>should<\/span><\/i> rise together.<\/span><\/p>\n

Do we really measure what we think we\u2019re measuring?<\/h2>\n

Productivity appears straightforward, that is, output divided by input, but becomes difficult to interpret across complex economies. In a factory producing identical widgets, output per hour worked is easy to measure. But modern economies produce thousands of heterogeneous goods and services. How do we compare the output of a care worker with that of a software engineer?<\/span><\/p>\n

Economists solve this problem by using prices to convert all goods and services into monetary value. Yet this creates a conceptual complication: when output is measured in monetary terms, \u201cproductivity\u201d becomes difficult to distinguish from income. Labour productivity, measured as value added per worker, is essentially total income (minus intermediate inputs) divided by the number of workers. Comparing productivity and wages, therefore, becomes close to comparing two different forms of income rather than assessing a relationship between physical output and compensation.<\/span><\/p>\n

The correlations we observe tell us something important about income distribution, but less about whether workers are becoming more efficient or \u201ccreating more\u201d in a physical sense.<\/span><\/p>\n

Rethinking the productivity-pay gap<\/h2>\n

The familiar chart suggests that workers are producing more, but not being compensated accordingly. Yet once measurement issues are acknowledged, the gap reflects a different underlying dynamic.<\/span><\/p>\n

Two forces drive the divergence:<\/span><\/p>\n

    \n
  1. A declining share of national income going to labour relative to capital, and<\/span>
    \n<\/span><\/li>\n
  2. Rising inequality within labour income, whereby top earners capture a disproportionate share of total wage growth.<\/span><\/li>\n<\/ol>\n

    While top earners experienced wage increases of around 160% over the period, typical workers saw little real growth. The divergence is real and economically significant, but it is fundamentally a distributional phenomenon, which is less a story of workers being underpaid relative to output and more one of changing income shares.<\/span><\/p>\n

    This distinction matters for policy. If the issue were simply that workers are producing more, but receiving less, then policymakers might focus on collective bargaining or minimum wage laws. However, if the central problem is the distribution of income between labour and capital, or within the labour force itself, then policies must also address capital concentration, market power, and institutional frameworks shaping how economic gains are shared.<\/span><\/p>\n

    What is actually happening to productivity?<\/h2>\n

    When we examine productivity in physical or energy\u2013based terms, that is, how effectively we transform inputs into useful outputs, growth has largely stagnated since the 1970s, contrasting sharply with monetary measures showing steady increases. <\/span>Industry\u2013level analysis<\/span><\/a> reveals some exceptions, but overall, much of the apparent productivity growth captured by traditional metrics reflects:<\/span><\/p>\n