Have productivity and pay decoupled in the UK?

Teichgraeber, Andreas; Van Reenen, John

POID Working Paper

Have productivity and pay decoupled in the UK?

In the long-run at the macro level, the real pay of workers tends to follow labour productivity. In recent years, however, there have been concerns that this relationship has broken down and that pay has become "decoupled" from productivity, growing much more slowly. If the mean hourly compensation of workers grows more slowly than GDP per hour, this means the labour share will fall and this has been a well-documented phenomenon in the US since the early 1980s. By contrast, we show that in the UK, employee mean hourly compensation has grown at the same rate as labour productivity between 1981 and 2019. Although there has been no "net decoupling" in this sense, there has been a large divergence between median employee hourly wage growth and productivity growth of about 25 percentage points. About three-fifths of this "total decoupling" is due to increasing inequality (mean wages growing faster than median wages) and one-third is due to the increased non-wage compensation costs, in particular employer pension contributions. However, this analysis relates to employee compensation. The average self-employed worker has seen their income grow by only 50%, compared to 80% for the average employee. Using micro-data, we show that this gap can essentially be all explained by (i) the growth in the numbers of "solo self-employed" (who have relatively low incomes), and (ii) a much greater fall in hours worked by the self-employed than for the employed. Finally, if we "correct" the labour share for self-employment and non-wage labour costs, the UK labour share has fallen by about 3.5 percentage points over the last four decades.