A recovery for all? The evolution of the relationship between economic growth and pay before, during and since the financial crisis

Document type
Briefing
Author(s)
Whittaker, Matthew
Publisher
Resolution Foundation
Date of publication
14 September 2015
Subject(s)
Employment, Poverty Alleviation Welfare Benefits and Financial Inclusion
Collection
Social welfare
Material type
Reports

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This briefing uses the latest wage and National Accounts data to consider how the ‘wedge’ between productivity growth and median pay growth that arose prior to the financial crisis in the UK – and which appears to have become a feature across a range of advanced economies in recent decades – has developed in the period since 2007. Over the full period (1983-2014) a 23 percentage point ‘wedge’ has opened up between productivity growth and median pay growth. Widening pay inequality accounts for around 71 per cent of the effect, with the deflator effect accounting for a further 28 per cent. Unlike in many other advanced economies, a shift in the labour share has played a relatively minor role accounting for around 9 per cent of the overall ‘wedge’. The compensation effect has served to narrow the gap between productivity and pay over the period as a whole, but has been a key driver of decoupling since the turn of the century. Looking specifically at the exceptional period since the financial crisis, The research finds that the productivity/median pay ‘wedge’ has continued to widen – with pay falling as productivity growth has stalled. Of the 23 percentage point gap identified over the longer period, roughly 8.5 percentage points appeared after 2007. Of this, around two-thirds (64 per cent) was accounted for by the deflator effect and around one-third (32 per cent) was due to the compensation effect. Pay inequality has been much less pronounced in this period

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