Productivity and Pay in the United States and Canada

(with Jacob Greenspon and Lawrence H. Summers)
International Productivity Monitor, Fall 2021


Abstract: We study the productivity-pay relationship in the United States and Canada along two dimensions. The first is divergence: the degree to which productivity has grown faster than pay. The second is delinkage: the degree to which incremental increases in the rate of productivity growth translate into incremental increases in the rate of growth of pay, holding all else equal. In both countries there has been divergence: the pay of typical workers has grown substantially more slowly than average labor productivity over recent decades, driven by both rising labor income inequality and a declining labor share of income. Even as the levels of productivity and pay have grown further apart, however, we find evidence for a substantial degree of linkage between productivity growth and pay growth: in both countries, periods with faster productivity growth rates have been periods with faster rates of growth of the pay of average and typical workers, holding all else equal. This linkage appears somewhat stronger in the US than in Canada. Overall, our findings lead us to tentatively conclude that policies or trends which lead to incremental increases in productivity growth, particularly in large relatively closed economies like the USA, will tend to raise middle class incomes. At the same time, other factors orthogonal to productivity growth have been driving productivity and typical pay further apart, emphasizing that much of the evolution in middle class living standards will depend on measures bearing on relative incomes.