Myth-busting: Productivity–pay gap (2022)

The productivity rates grew 62.5% in the period 1979–2021 while the increase in wages was only 17.5%, EPI states.

Is the link between productivity and wages broken?

What is the productivity–pay gap?

Simply put, the “productivity–pay gap” refers to the divergence between the increase in productivity rates and the increase in the average worker’s salary. 

In the period 1948–1979, productivity growth was at 118.4%, while hourly compensation growth was at 107.5%. 

Then, in the period 1979–2021, productivity growth in total was 62.5% and hourly compensation growth was 15.9%. 

Here are some relevant productivity-pay milestones.

Year	Productivity growth rate	Hourly compensation growth
1950	50.33%	53.14%
1960	66.62%	69.74%
1970	87.70%	91.20%
1980	97.34%	97.34%
1990	109.81%	93.64%
2000	126.39%	100.17%
2010	151.06%	109.63%
2020	164.6%	117.3%

Now, wages refer to all income and compensation made to employees for their physical and/or mental work.

The economics definition of productivity is calculated as “a ratio of gross domestic product per hour worked, a measure of output per unit of input”. 

Wages and productivity were not growing at a directly proportional pace — it’s the truth. But, productive workers have a higher ability to focus and know when it’s time to take a break. Their time management skills are better, resulting in a better work-life balance.

Productivity—pay gap: the most significant factors

According to the MIT economist David Autor, cited in another relevant EPI’s analysis, the pay–productivity gap is a combination of two major forces driving the inequality that include:

• The rate of growth of educational attainment, and 
• The direction of technological change.

Some other relevant factors include:

• Globalization,
• Labor market institutions such as unions, and
• Market power.

3 Stages in the productivity–pay gap

We can differentiate between 3 important stages in the productivity–pay gap:

1. Growth in sync stage (1948–1973), 
2. The divergence stage (1973–1979), and
3. A different pace of growth stage (after 1979). 

What are some of the reasons for the wages–productivity gap?

Here are several factors that possibly influenced the wages–productivity gap:

• Diversity of industries — Different regions of the world, due to various specific natural, economic, and social aspects, favor different industries.
• Living standards — They have an immense impact on the minimum wage. 
• Inflation rates — The productivity–pay gap also depends on how you measure inflation. 

A longitudinal study of the productivity–pay gap

You must have heard about some misconceptions and even urban myths regarding the productivity–pay gap. No wonder you did, as even the economists can’t agree amongst themselves about the exact definitions, or how productivity is calculated. 

Let’s first examine the major methodological flaws in the economists’ reasoning — via a longitudinal study of the productivity–pay gap covering the following topics:

• Methodological flaws, and
• The role of automation.

Productivity–pay gap: methodological flaws

When it comes to the productivity-pay gap, the years with the lowest employment rates are especially suitable for comparison — the years 1979 and 2019.

According to EPI, the explanatory factors that affect the productivity-pay gap are:  

• Inequality of compensation,
• Loss in labor’s share of income, and
• Divergence of consumer and output prices.

What role does automation play in the productivity–pay gap?

Additionally, there’s automation — one of the most controversial topics when it comes to the productivity–pay gap since the 1980s. According to the International Data Corporation (IDC), by 2024, global AI spending will reach a $500 billion threshold.  

Automation does bring change and implies the need for different skills for the future — but, that’s what progress is all about. 

Several important distinctions in the productivity–pay gap 

We can also approach the topic of the productivity–pay gap by analyzing specific factors such as:

• Job level,
• Region, and
• Gender.

The productivity–pay gap by job level

The table below depicts the annual average wages of the bottom 90% of earners.

Year	1979	2007	2009	2018	2019	2020
Average annual wage	$30,880	$36,025	$35,806	$38,255	$38,923	$40,085

The table below depicts the change in annual earnings for 3 different categories of earners:

• Top 10% (excluding the top 1%),
• Top 1%, and
• Top 0.1%.

Year	1979	2007	2009	2018	2019	2020
90–99% average	$102,262	$148,614	$148,228	$162,873	$167,851	$173,176
Top 1% average	$294,966	$502,071	$459,165	$523,302	$528,308	$558,349
Top 0.1% average	$656,823	$3,037,633	$2,243,480	$2,894,671	$2,924,246	$3,212,486

The most significant growth happened for the richest, 0.1% earners, as their portion of the total wages more than tripled over the course of 41 years.

To provide an example, the latest data for 2021 indicates that CEOs were paid a whopping 399 times more than typical workers.  

The productivity–pay gap by region

Different countries focus on different industries, so how exactly to measure a country’s productivity? 

Use the two acronyms:

• GDP — Gross domestic product is the monetary value of goods and services within a certain country, and
• PPP  — An average worker’s productivity per hour shows how much money workers contribute to the country’s economy per hour.

The top 10 most productive countries

Here’s the latest list of the top 10 most productive countries, which reflects an average worker’s productivity per hour:

1. Ireland 
2. Luxembourg
3. Denmark
4. Belgium
5. Norway
6. Switzerland
7. France
8. US
9. Austria
10. Sweden

The productivity–pay gap by gender

Then there’s the gender pay gap — the percentage by which hourly wages differ for men and women, being lower for the latter.

Even nowadays, women are paid less for the same position compared to their male counterparts. So, apart from the distribution of jobs between male and female workers — there’s a notable difference in terms of wages.

For example, the data mentioned in a CNBC article points out that for every $1 a man makes in the US, a woman in the same position earns $0.83.

The conclusion is — women are still dealing with the consequences of the patriarchal system.  

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