The Link Between Productivity and Wages

If employees are more productive, employers can afford to pay them more – so there is a link between productivity and wages

The OECD defines productivity as “a ratio between the output volume and the volume of inputs”.  In the context of the labour market, it is a measure of how much output can be obtained from a given number of employees.  Its definition quotes Paul Krugman:

“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”.

America, for example, has high overall productivity.  And Americans can ask for higher wages than those in less developed countries, because of the link between productivity and wages.

Productivity is affected by several factors:

●  New technologies such as automation, better facilities, and better infrastructure, can make industry more efficient (3.2.8).

●  Education and training (3.2.5) can make labour more productive.

●  The regulatory burden (3.3.1) can affect productivity.

Automation has the biggest impact.  A Financial Times interview, Nobel economist Angus Deaton on a year of political earthquakes, included this quotation:

“Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result. I don’t think that globalisation is anywhere near the threat that robots are.”

In terms of the world economy, globalisation shifts work around – but automation reduces the total amount of work needed.  It isn’t quite as simple as that, though: Duncan Weldon’s article, Droids won’t steal your job; they could make you rich, pointed out that increased efficiency in one industry generates more wealth and thereby more demand for other jobs – though these might be in the service sector, and many such jobs are low-paid.  A bigger service sector simultaneously reduces a country’s average wage levels, and its average measured productivity, but keeps people employed.



This page is intended to form part of Edition 4 of the Patterns of Power series of books.  An archived copy of it is held at https://www.patternsofpower.org/edition04/3331.htm.