Does productivity drive wages? Evidence from sectoral data

Alex Tuckett

Since 2008, aggregate productivity performance in the UK has been substantially worse than in the preceding eight years. Over the same period, aggregate real wage growth has also been significantly lower – it has averaged -0.4% per annum from 2009-16, compared with 2.3% per annum from 2000-08. The MPC, and others, have drawn a link between these two phenomena, arguing that low productivity growth has been a major cause – if not the major cause – of weak wage growth. The logic is simple – if workers produce less output for firms, then in a competitive market firms will only be willing to employ them at a lower wage.

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Bitesize: Exploring UK sectoral productivity

Ian Billett and Patrick Schneider.

As time goes to infinity, the probability that a productivity analyst will wonder ‘which sectors are driving these trends?’ goes to one. We present an interactive sectoral productivity tool to help you explore this question without any fuss.

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The world trade slowdown (redux)

Gene Kindberg-Hanlon and David Young.

The volume of world trade is now 17% below where it would be had it grown at pre-crisis trend after 2011. This post argues that most of this gap can be explained by weakness in world GDP, but stalling expansion in global value chains (GVCs) is playing an increasingly important role. We also argue that this shortfall can’t be explained by shifts in the geographical or the expenditure split of global GDP growth. While world trade grew twice as quickly as world GDP pre-crisis, it is likely to grow at about the same rate as world GDP in the future. This matters: weak trade could explain half of the 1pp fall in annual global productivity growth since the crisis.

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There are two productivity puzzles

Patrick Schneider.

Much has been written about the productivity puzzle. But there are actually two puzzles apparent in the data – one in the level that hit at the crisis and the other in the growth rate, which is a more recent phenomenon – and they could be driven by completely different sources. Distinguishing between the two puzzles is important precisely because of these potential differences – if anyone analyses the puzzle as a whole looking for the force driving it, the actual underlying variety will confound our estimates of the relative importance of these drivers.

In this post I discuss:

what people mean by the productivity puzzle, usually a percent deviation from the pre-crisis trend;
how I think of it as actually two puzzles: one in the level and the other in the growth rate; and
why this distinction can be important, using the example of a simple growth accounting decomposition of productivity growth into capital deepening and technological advancement.

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Fish and (micro)chips: Why I’m relatively relaxed about robots

John Lewis.

My earlier post arguing that robotisation wouldn’t destroy jobs, slash wages or drastically shorten the working week prompted many thoughtful responses. Richard Serlin and others countered, arguing that if automation affects all sectors, then displaced workers may have nowhere to go. Others asked if the sheer scale, speed and scope of robotisation might make it much more disruptive. Or if wages fall, who will be able to buy the extra output? And Noah Smith raised the prospect that robotisation might eventually differ from earlier waves of innovation by replacing rather than complementing human labour. This post attempts to respond to those points, expand on the original post and explain why I’m still relatively relaxed about robots.

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Robot Macroeconomics: What can theory and several centuries of economic history teach us?

John Lewis.

Advances in machine learning and mobile robotics mean that robots could do your job better than you. That’s led to some radical predictions of mass unemployment, much more leisure or a work free future. But labour saving innovations and the debates around them aren’t really anything new. Queen Elizabeth I denied a patent for a knitting machine over fears it would create unemployment, Ricardo thought technology would lower wages and Keynes famously predicted a 15 hour working week by 2030. Understanding why these beliefs proved to be wrong gives us important insights into why similar claims about robotisation might be incorrect. But automation could nevertheless have sizeable distributional implications and ramifications well beyond the industries in which it’s deployed.

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Is finance a powerful driver of growth?

Saleem Bahaj, Iren Levina and Jumana Saleheen.

Since the financial crisis the UK has experienced a period of weak productivity growth, weak investment coupled with a decline in credit to non-financial sectors of the economy. But there is debate about the direction of causality: did low growth and other structural factors mean firms and households wanted to borrow less – as argued by Martin Wolf? Or did the financial sector offer too few funds to the real economy in the wake of the crisis as banks tried to repair their balance sheets. Alternatively, the financial system may not be functioning properly in general, if much of the financial sector’s activity contributes little to the betterment of lives and efficiency of business – a point made by John Kay.

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Productivity in the UK vs the US – can we play catch up again?

Marko Melolinna.

Productivity growth in the UK has been puzzlingly weak in recent years. By contrast, US productivity growth has been relatively robust at higher levels. There is a macroeconomic literature, however, that suggests that countries with lower levels of productivity should grow more quickly than high productivity countries. I argue that there is evidence of the UK catching up with the US in the past, but this relationship appears to have broken down after the financial crisis. If the past relationship between US and UK productivity returns, the prospects for UK productivity could be bright. But this improvement is likely to take time and will depend on fundamental drivers of productivity, like investment, R&D spending and educational attainment.

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The impact of e-commerce on the consumer sector- view from a Bank of England Agent

Tim Pike.

The internet’s share of UK retail sales is – at 12% – the highest in the developed world. In my daily conversations with businesses and services, I find that some sectors are responding much more nimbly to the competition from internet retailers than others. In this blog I argue that the growing share of internet retailing is likely to reduce business investment, especially in buildings, but the additional capacity associated with internet retailing is likely to be a drag on retailers’ profitability that may last for many years. In my view the long-term effect on capital productivity should be positive, but the effects on labour productivity are less obvious and may be adverse.

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Skills matter: The changing workforce and the effects on pay and productivity

Matthew Corder

Pay and productivity growth over the past couple of years have remained weak despite a rapid fall in unemployment and robust GDP growth. But these aggregate measures in the UK reflect the sum of a diverse range of individuals in the workforce. Changes in the mix of that workforce, therefore, can affect pay and productivity growth. Based on analysis of the determinants of individual workers’ wages, I estimate that changes in the mix of the workforce may account for about 1pp of the recent weakness in annual average pay growth relative to normal. Continue reading “Skills matter: The changing workforce and the effects on pay and productivity” →