TECHNOLOGY AT WORK
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10<br />
Citi GPS: Global Perspectives & Solutions February 2015<br />
productivity growth of the late-1990s came to a halt, the view that most of the<br />
benefits from the digital revolution have already been seen has received more<br />
attention.<br />
The changing nature of innovation can<br />
explain why wages have failed to grow in<br />
tandem with productivity<br />
While a decline in the technological dynamism of the rich world would explain the<br />
recent fall in productivity and the growing concentration of wealth highlighted by<br />
Piketty, it does not explain why wages have failed to grow in tandem with<br />
productivity. One explanation is the changing nature of innovation. Although<br />
technology can raise productivity and boost wages, it can also take the form of<br />
capital that substitutes for labour. In that case, productivity growth will simply<br />
enhance capital's share of income, and thus the concentration of wealth.<br />
The Growing Gap between Productivity and Pay – Citi Economics<br />
Figure 3 shows the gap between compensation of workers and their productivity for the United States, considering<br />
data from the Bureau of Labor Statistics. The figure compares the total output per hour worked in the economy (a<br />
measure of productivity) against the hourly compensation rate for all workers, both adjusted for inflation. There has<br />
been a growing gap between the two for decades. Since 1980, productivity has grown at an annual average rate of<br />
roughly 2%, compared to just under 1% annual average growth for real hourly compensation.<br />
Figure 4 shows a GDP-weighted average estimate of the so-called productivity gap for 16 advanced economies. 13<br />
Consistent with the US story, the advanced world as a whole has also seen productivity decouple from the<br />
compensation paid to workers. However, the decoupling for the advanced-economy as a whole is not as severe as<br />
it is for the US alone. Since 1980, advanced-economy productivity has grown at an annual average rate of 1.7%,<br />
compared to 1.1% annual average growth for advanced-economy real hourly compensation. This 0.6 percentage<br />
point average growth rate difference between productivity and compensation in the advanced world is still<br />
nonetheless meaningful. It implies that, over time, a greater fraction of output produced per hour worked in the<br />
advanced world has gone to property owners in the form of profits rather than to workers in the form of<br />
compensation – a trend consistent with declining labour shares.<br />
Figure 3. Gap between productivity and pay in the United States<br />
250<br />
Index, 1970=100<br />
230<br />
210<br />
190<br />
170<br />
150<br />
130<br />
110<br />
90<br />
Real Output per Hour Worked<br />
70<br />
Real Compensation per Hour Worked<br />
50<br />
1950 1960 1970 1980 1990 2000 2010<br />
Source: : BLS, Citi Research<br />
Figure 4. Advanced economy average productivity gap<br />
250<br />
Index, 1971=100<br />
230<br />
210<br />
190<br />
170<br />
150<br />
130<br />
110<br />
90<br />
Real GDP per Hour Worked<br />
70<br />
Real Total Compensation per Hour Worked<br />
50<br />
1970 1975 1980 1985 1990 1995 2000 2005 2010<br />
Source: European Commission, Citi Research<br />
13 Figure 4 includes data for 16 advanced economies. Relative to those included in<br />
Figure 2 Australia, Austria and Greece were dropped due to data limitations. Output is<br />
deflated with the GDP deflator, whereas compensation is deflated by national consumer<br />
price indexes.<br />
© 2015 Citigroup