wages and labour productivity across developed economies€¦ · wages and labour productivity...

Wages and labour productivity across developed economies, 1999-2013

Kristen Sobeck 1 ILO

Abstract: The relationship between wages, labour productivity and the wage share has received much attention in recent years. However, little research carefully explores the data used to construct these relationships (which often have important policy implications). This paper explores the relationship between wages and productivity across developed economies between 1999 to 2013 using data compiled for the ILO Global Wage Reports. The paper shows the relationship between these variables in all developed economies. It then evaluates factors which influence this relationship, namely the choice of deflator and choice of the measure used to represent wages (i.e. wages or compensation of employees). Finally, it considers some measurement issues which could further contribute to differences across countries.

1International Labour Office, 4 route de Morillons, CH-1211 Geneva, Switzerland. Email: [email protected]. The usual disclaimers apply.

Introduction

There is growing evidence which shows that labour productivity growth has outstripped real wage growth and the labour income share has declined across the globe. 2 This decoupling has been attributed to a number of factors some of which include: Financialisation, globalization, technological change and a retrenchment of the welfare state. 3 These changes have also accompanied increases in inequality across the globe.4

The ILO GWR 2014/15 echoed these trends and showed that labour productivity growth outstripped real wage growth across developed economies (see figure 1). As the figure shows, the final conclusion – that labour productivity growth outstripped real wage growth at the regional level – remains the same irrespective of the measure of wages used or deflator chosen. However, why do the measure of wages and deflator chosen actually matter?

Figure 1. Labour productivity, real wages, and esti mated real compensation per employee: indices, in developed economies, 1999–201 3

Source: ILO Global Wage Report 2014/15.

This paper explores the relationship between the wages and productivity across developed economies between 1999 to 2013. It then evaluates other factors which influence this relationship, namely the choice of deflator and choice of the measure used to represent wages (i.e. wages or compensation of employees). Finally, it considers some measurement issues which could further contribute to differences across countries.

2 ILO Global Wage Report 2012/13; ILO Global Wage Report 2014/15;

3 ILO Global Wage Report 2012/13;

4 ILO Global Wage Report 2014/15;

100

106

112

118

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real wage index - CPI Real wage index - GDP deflator

Labour productivity index Real compensation - CPI

Real compensation - GDP

The focus is limited to developed economies where the relationship between wages and productivity is easier to establish than in developing and emerging economies. In the former, data is often of better quality and employees, who earn a wage, represent close to 90 per cent of total employment. In contrast, in developing and emerging economies data concerns (i.e. quality and availability) are greater and employees represent a smaller share of total employment. Since employees represent a smaller share of employment (and employees are the only workers who receive a wage), compensation of employees is not as representative of total employment-related income and therefore less comparable with trends in overall labour productivity.

Definitions, concepts, and measurement debates

Before turning to the relationship between wages and productivity, the various concepts related to wages and productivity are described below. Wages include pay for time worked (including overtime), pay for time not worked (i.e. holidays, paid vacation), and bonuses and gratuities. Compensation on the other hand is a broader measure, one component of which includes wages, but also other components like employers’ social contributions.5

Wages, as a share of compensation, can vary across countries and change over time. For example, in the United States, “Because of the rapid growth of health insurance benefits and other fringe benefits, wage and salary payments declined from 89.4% of total compensation in 1970 to just 80.9% in 2006.”6. Similarly, in the United Kingdom, non-wage costs increased since 2001 because “Non-wage costs have risen in real terms throughout much of the period since around 2001, although they stabilised between 2006 and 2009. The upward trend may reflect growing employer payments necessary to tackle pension fund deficits. Non-wage costs jumped sharply between 2009 and 2010, in part due to a rise in employers’ national insurance contributions…”. Since non-wage costs, like health insurance or fringe benefits, are actually benefits to employees, the argument follows that growth of compensation (which includes these non-wage benefits) should align with labour productivity growth, as opposed to wages alone.

While there are many definitions of labour productivity , in this paper it is defined as output per worker calculated by dividing gross domestic product in PPP$ by total employment. One advantage of this measure is that it is readily available for all countries. However, one limitation is that it implicitly incorporates hours worked. This presents implications for the calculation of productivity, particularly in times of recession or industrial unrest. For example, while the total number of employed workers may not change during a recession, their hours

5 For the statistical definitions of wages (statistically referred to as earnings) and compensation of employees, see annex 1. As a reference, compensation of employees and wages differ from labour cost (not discussed in this paper). Labour cost is even broader than compensation of employees and includes additional items like vocational training, worksite amenities provided by the employer (i.e. a cafeteria, fitness centre, etc.), etc. For a detailed definition of labour cost, see: ILO (International Labour Office). 1966. Resolution concerning statistics of labour cost, adopted by the 11th International Conference of Labour Statisticians (Geneva).

6 Feldstein, M. (2008). Did wages reflect growth in productivity? Journal of Policy Modeling 30. P.591-594.

worked might (thereby overstating declines in labour productivity). As a result of this limitation, monthly wages and compensation per employee are used as the measures compared against labour productivity since they both also incorporate hours worked.

Since labour productivity captures the output of all workers (self-employed and employees). It follows that the most appropriate concept to compare with labour productivity would therefore be the most comprehensive measure of remuneration: compensation per worker. Unfortunately, while calculating the compensation of employees is a straightforward exercise, calculating the compensation of the self-employed is more complicated. In particular, it is difficult to differentiate between the percentage of income the self-employed worker considers her wage and the percentage reinvested in her company. For this reason, labour productivity is most frequently compared with wages or compensation of employees. As previously mentioned, this is less important in developed economies where self-employment represents about 10 per cent of total employment.

Once measures of wages and compensation are selected, the values must be deflated by a deflator: the GDP deflator or the consumer price index (CPI). The GDP deflator captures the price of goods produced in the domestic economy and is affected by export prices. For example, as the price of mineral exports increases, the GDP deflator will also increase. In other words, the GDP deflator is affected by a country’s terms of trade. In contrast, the CPI reflects the prices which affect consumers (i.e. the prices of goods consumers buy which includes imports). The GDP deflator and the CPI can differ because the basket of goods consumed by consumers is different from the overall prices of all goods produced domestically. For example, during a commodity boom, the relative price of Australian goods (vis-à-vis the rest of the world) increased, while the relative prices of imports declined. As a result, consumer prices (and the CPI) did not rise by as much as prices of goods produced in the domestic economy (GDP deflator).

Which deflator should be used to calculate real wages? The appropriate deflator depends on the end-use. When assessing the standard of living, the CPI more accurately reflects changes in the purchasing power of consumers (who benefit from improved terms of trade). However, for businesses, labour costs are linked to the costs they as producers face (as opposed to those faced by consumers); arguably, in this case, the GDP deflator may be more appropriate. Another argument in favour of the GDP deflator is that GDP is deflated by the GDP deflator to compute real output and subsequently labour productivity; using the GDP deflator to compute real wages and real compensation removes the variation in deflators which could drive the end results.

Trend analysis

Is the relationship between wages, compensation and labour productivity constant across concepts and deflators?

Given the various deflators and concepts available for comparison with labour productivity, to what extent does the choice of measure change the overall relationship between the variables? The first column identifies countries where only the choice of deflator makes a difference. For example, in Australia, it is irrelevant whether wages or compensation is

chosen; the choice of deflator will determine the relationship between these variables and labour productivity. The second column shows countries where only the concept (i.e. wages or compensation) matters. For example, in the United Kingdom, compensation always grows faster than labour productivity irrespective of the deflator used; wages on the other hand always grow less than labour productivity.

The third column lists countries where both the concept and the deflator matter. For example, in Bulgaria, only compensation deflated by the CPI grew less than labour productivity. All other calculations grew less than labour productivity. The fourth column lists countries where neither the concept nor the deflator matters. For example, in the United States, labour productivity grew faster than wages and compensation deflated by both the CPI and GDP deflator. One example of each column is also shown in Figure 2 (all economies are included in annex 2). Overall, the data suggest that, in the majority of developed countries, the relationship between wages, compensation and labour productivity will depend on the concept and deflator used.

Table 1: The relationship between wages, compensati on and labour productivity in developed economies, 1999-2013

Deflator Concept Both deflator and concept

Neither deflator nor concept

Australia Belgium Czech Republic Ireland Latvia Norway Romania Slovenia

Cyprus Hungary Luxembourg United Kingdom

Austria Bulgaria Canada Denmark Italy Japan Netherlands Portugal Slovakia Switzerland

Estonia Finland France Germany Greece Lithuania New Zealand Poland Spain Sweden United States

Note: The GDP deflator is not available for Malta.

Figure 2: Wages, compensation and labour productivi ty

Deflator Concept

Both deflator and concept Neither deflator no r concept

9010

011

012

0

2000 2005 2010 2015year

wage_index wage_index_GDPrebasecomp_indexCPI comp_indexGDPlp_index wageshare_index

Australia

100

105

110

115

120

125

2000 2005 2010 2015year


United Kingdom

What is the relationship between wages and labour productivity given the combination of different variables and deflators?

Table 2 breaks down the relationship between wages, compensation and labour productivity a step further. Among countries where the relationship between these variables hinges on the deflator or concept used, a singular relationship between wages and labour productivity cannot be identified. In contrast, a clear relationship between the variables can be determined for countries where the relationship does not depend on the concept or the deflator. In these cases, labour productivity growth outstripped wage and compensation growth in six countries and wage and compensation growth outstripped labour productivity growth In five.

In cases where both the deflator and the concept influence the relationship with labour productivity, the predominant trend is indicated in table 2. For example, in Austria three out of four of the combinations (wage/GDP deflator, wage/CPI, compensation/GDP deflator, compensation/CPI) show that labour productivity has grown faster than wages and compensation. On this basis, labour productivity outstripped wage and compensation growth in seven countries and the opposite was true in two.

In conclusion, the relationship between wages, compensation and labour productivity cannot be assessed in 12 countries. Labour productivity has grown faster than wages and compensation in 13 countries and wages and compensation have growth faster than labour productivity in 7 countries.

100

150

200

2000 2005 2010 2015year


Bulgaria

9010

011

012

013

0

2000 2005 2010 2015year


United States

Table 2: The relationship between wages, compensati on and labour productivity in developed economies based on trend typology, 1999-2 013

Deflator Concept Both deflator and concept

Neither deflator nor concept

Australia Belgium Czech Republic Ireland Latvia Norway Romania Slovenia

Cyprus Hungary Luxembourg United Kingdom

Wages & compensation (mostly) < LP Austria (3/4) Canada (3/4) Italy (3/4)7 Japan (3/4) Netherlands (3/4) Portugal (3/4) Slovakia (3/4) Switzerland (3/4)

Wages & compensation < LP Germany Greece Lithuania Poland Spain United States

Not applicable Not applicable Wages & compensation (mostly) > LP Bulgaria (3/4) Denmark (3/4)

Wages & compensation > LP Estonia Finland France New Zealand Sweden


Are the trends in labour productivity and wages and compensation deflated by the GDP deflator consistent with the labour income share?

Since the definition of wages is not as broad as the definition of compensation, one question which arises is whether the trends in wages are still consistent with the labour income share? Table 3 shows that in most cases, the relationship between wages deflated by the GDP deflator and labour productivity are consistent or mostly consistent with trends in the labour income share. Wages deflated by the GDP deflator are used in this analysis since labour productivity and the labour income share are derived from GDP; using the GDP deflator reduces any variation in trends caused by a difference in deflators. “Mostly consistent” refers to series where the relationship between wages and labour productivity follow trends in the labour income share with the exception of a few years between 1999 and 2013.

7 In Italy, labour productivity actually declined. Subsequently, wages and compensation declined by less than labour productivity in most cases.

Table 3: Wages (deflated by the GDP deflator) and l abour productivity: are they consistent with the labour income share?

Consistent Mostly consistent Not consistent Australia Austria Bulgaria Canada Estonia Finland Germany Ireland Norway Spain United States

Belgium Cyprus Czech Republic Denmark France Italy Lithuania Luxembourg Netherlands Poland Portugal Romania Slovakia Slovenia Sweden Switzerland United Kingdom

Greece Hungary Japan Latvia New Zealand


What could cause the occasional and considerable inconsistencies with the labour income share? In some cases, the inconsistencies with the labour income share likely occur when the wage data are not representative of all employees or when they are provisional. For example, in Greece, there are three wage data sources: the Structure of Earnings Survey (SES), a wage index, and an ILO estimate based on the national accounts from Eurostat. The SES only has an estimate of wages made by the national statistical office from 2000 to 2009; unfortunately, more methodological data are not available from the national statistical office concerning the coverage of these data. The wage index also has limited methodological information available however, it is clear from the data that certain sectors, like agriculture and the public sector, are excluded. Finally, the ILO estimate using national accounts data from Eurostat is an estimate, but it is comprehensive in its employee, sectoral and geographic coverage. More importantly, the ILO estimate from the national accounts actually follows trends in the wage share.

In Japan, the data also only cover a subset of employees. The wage series only covers full-time employees in the private sector, in companies with at least five regular employees. The data also exclude the agricultural sector and are limited to contractual cash earnings for ordinary workers. Subsequently, while the measure for compensation deflated by the GDP deflator corresponds to trends in the labour income share, it is difficult to know whether trends in wages do not follow because the wage data are not representative of trends of all employees in Japan or if there was a change in the composition of compensation over time (or both). This is also the case in Hungary where the data are limited to full-time employees who work in enterprises with at least five employees.

Provisional data, estimates, improvements in data collection over time or corrections for series breaks, can also partially contribute to inconsistencies. For example, wage data for the Czech Republic, the Netherlands, or Portugal are inconsistent with the labour income share for the latest year. In the Czech Republic and the Netherlands, data for 2013 were not

available at the time of the analysis. Subsequently, real wage growth from another source was taken for the final year. In Portugal, data were not available for 2013 so an estimate was made based on the elasticity between wages and labour productivity among developed economies following the crisis. In Latvia, the series is inconsistent with the labour income share but only until about 2005; this is suggestive of changes in the quality of data overtime. In New Zealand, the data only refer to the third quarter of the year, as opposed to the entire year; this could contribute to inconsistencies with the labour income share if the third quarter is not as representative of wage trends entire year. Consequently, both the combination of sources and their provisional nature seem to have contributed to discrepancies with the labour income share at the end of the period.

In conclusion, wages deflated by the GDP deflator seem to provide a reasonable proxy for labour compensation in most cases. However, in some cases trends in wages diverge from trends in the labour income share. This can partially be attributed to data coverage and measurement related issues. However, it can also be attributed to differences in trends in wages and compensation. Subsequently, while wage and labour productivity trends alone provide a reasonable proxy for the labour income share in most cases, it is equally as important to consider these trends alongside those of compensation.

What grew more: the CPI or GDP deflator; compensation or wages?

Turning to all countries, table 2 shows trends in the CPI and GDP deflator. In most countries, the CPI grew more than the GDP deflator. This implies that if the CPI is used to deflate wages or compensation, it will generally result in lower cumulative real growth as compared to using the GDP deflator. In contrast, countries seem to be evenly split between the growth in wages or compensation. In some countries, wages grew by more than compensation whereas in others, compensation grew more than wages.

Table 2: Growth of the CPI versus GDP deflator and wages versus compensation

CPI grew more than the GDP deflator

GDP deflator grew more than the CPI

Wages grew (or declined) more than

compensation

Compensation grew (or declined) more

than wages Austria Belgium Bulgaria Czech Republic Finland France Germany Greece Hungary Ireland Italy Japan Netherlands New Zealand Poland Portugal Slovakia Slovenia Spain United States

Australia Canada Cyprus Denmark Estonia Latvia Lithuania Luxembourg Norway Romania Sweden Switzerland

Australia Austria Belgium Bulgaria Cyprus Finland France Germany Greece Hungary Ireland Japan New Zealand Poland Portugal Slovakia Sweden

Canada Czech Republic Denmark Estonia Italy Lithuania Luxembourg Malta Netherlands Norway Romania Spain Switzerland United Kingdom United States

Note: In Latvia and Slovenia, wages and compensation grew by the same amount. In the United Kingdom, the GDP deflator and CPI increased by the same amount.

Conclusions The relationship between wages, compensation, labour productivity and the labour income share often depends on how certain variables are measured. This paper shows the trends in the relationship between these variables for developed economies between 1999 and 2013. The paper shows that:

• In about half of developed economies, the relationship between wages, compensation and labour productivity depends on the concept of wages or compensation used and/or the type of deflator.

• In the other half of developed economies, the choice of deflator and concept (wages versus compensation) are irrelevant. In 5 of the 11 countries, wage and compensation growth with either inflator always exceeds that of labour productivity growth; the opposite is true in 6 countries.

• Since wages represent a proportion of compensation which varies from country to country, the relationship between wages and labour productivity may not be the same as that between compensation and labour productivity. This paper shows that in most cases trends in wages (deflated by the GDP deflator) and labour productivity serve as a reasonable proxy for trends in compensation. In other words, trends in wages and labour productivity generally follow trends in the labour income share.

• In the few countries where trends in wages (deflated by the GDP deflator) and labour productivity are inconsistent with the labour income share, the discrepancies can be

explained by a combination of differences in: data coverage, series breaks, estimates, provisional data, and improvements in data over time.

• The CPI grew more than the GDP deflator in most countries. This implies that in most cases deflating by the CPI underestimates real wage and compensation growth as compared with the GDP deflator. Subsequently, labour productivity would be expected to exceed real wage growth more frequently when the CPI is used to deflate wages.

• Compensation grew more than wages in about half of countries; the opposite is true for the other half.

References

Feldstein, M. 2008. Did wages reflect growth in productivity? Journal of Policy Modeling 30. P.591-594.

ILO (International Labour Office). 1966. Resolution concerning statistics of labour cost, adopted by the 11th International Conference of Labour Statisticians (Geneva).

ILO (International Labour Office). 1973. Resolution concerning an integrated system of wages statistics, adopted by the 12th International Conference of Labour Statisticians (Geneva).

(ILO).International Labour Office. 2012. Global Wage Report 2012/13: Wages and equitable growth (Geneva).

(ILO).International Labour Office. 2014. Global Wage Report 2014/15: Wages and income inequality (Geneva).

Annex 1. Wages and compensation of employees

In this paper, wages refer to the statistical definition of earnings. Earnings should include: (1) Direct wages and salaries for time worked, or work done, cover: (i) straight-time pay of time-rated workers; (ii) incentive pay of time-rated workers; (iii) earnings of pieceworkers (excluding overtime premiums); (iv) premium pay for overtime, shift, night and holiday work; (v) commissions paid to sales and other personnel. Included are: premiums for seniority and special skills, geographical zone differentials, responsibility premiums, dirt, danger and discomfort allowances, payments under guaranteed wage systems, cost-of-living allowances and other allowances. (2) Remuneration for time not worked, comprises: direct payments to employees in respect of public holidays, annual vacations, and other time off with pay granted by the employer. (3) Bonuses and gratuities cover seasonal and end-of-year bonuses, additional payments in respect of vacation period (supplementary to normal pay) and profit-sharing bonuses. Earnings include cash earnings and in-kind payments, but the two should be distinguished from each other. Compensation of employees is:

Recorded on an accrual basis; that is, it is measured by the value of the remuneration in cash or in kind that an employee becomes entitled to receive from an employer in respect of work done during the relevant period, whether paid in advance, simultaneously or in arrears of the work itself. No compensation of employees is payable in respect of unpaid work undertaken voluntarily, including the work done by members of a household within an unincorporated enterprise owned by the same household. Compensation of employees does not include any taxes payable by the employer on the wage and salary bill, for example, a payroll tax; such taxes are treated as taxes on production in the same way as taxes on buildings, land or other assets used in production.

Compensation of employees has two main components:

(1) Wages and salaries payable in cash or in kind.

(2) Social insurance contributions payable by employers, which include contributions to social security schemes; actual social contributions to other employment-related social insurance schemes and imputed social contributions to other employment-related social insurance schemes.

Sources: Cited directly from the 1973 Resolution concerning an integrated system of wages statistics, adopted by the Twelfth Conference of Labour Statisticians; and System of National Accounts 2008.

Annex 2. The wage share, wages, compensation, and labour productivity by country, 1999-2013

9010

011

012

0

2000 2005 2010 2015year


Australia

9095

100

105

110

2000 2005 2010 2015year


Austria

9510

010

511

0

2000 2005 2010 2015year


Belgium10

015

020

0

2000 2005 2010 2015year


Bulgaria

9510

010

511

011

5

2000 2005 2010 2015year


Canada80

9010

011

012

013

0

2000 2005 2010 2015year


Cyprus

100

120

140

160

2000 2005 2010 2015year


Czech Republic95

100

105

110

115

120

2000 2005 2010 2015year


Denmark

100

120

140

160

180

200

2000 2005 2010 2015year


Estonia10

011

012

013

0

2000 2005 2010 2015year


Finland

100

105

110

2000 2005 2010 2015year


France90

9510

010

511

0

2000 2005 2010 2015year


Germany

8010

012

014

0

2000 2005 2010 2015year


Greece10

012

014

016

0

2000 2005 2010 2015year


Hungary

9010

011

012

013

014

0

2000 2005 2010 2015year


Ireland90

9510

010

5

2000 2005 2010 2015year


Italy

9010

011

012

0

2000 2005 2010 2015year


Japan10

015

020

025

0

2000 2005 2010 2015year


Latvia

5010

015

020

0

2000 2005 2010 2015year


Lithuania90

100

110

120

130

2000 2005 2010 2015year


Luxembourg

9510

010

511

011

5

2000 2005 2010 2015year


Malta95

100

105

110

2000 2005 2010 2015year


Netherlands

9510

010

511

011

512

0

2000 2005 2010 2015year


New Zealand80

100

120

140

160

2000 2005 2010 2015year


Norway

8010

012

014

016

0

2000 2005 2010 2015year


Poland95

100

105

110

115

120

2000 2005 2010 2015year


Portugal

5010

015

020

025

0

2000 2005 2010 2015year


Romania10

012

014

016

0

2000 2005 2010 2015year


Slovakia

100

110

120

130

140

2000 2005 2010 2015year


Slovenia90

9510

010

511

0

2000 2005 2010 2015year


Spain

100

110

120

130

2000 2005 2010 2015year


Sweden95

100

105

110

115

2000 2005 2010 2015year


Switzerland

100

105

110

115

120

125

2000 2005 2010 2015year


United Kingdom90

100

110

120

130

2000 2005 2010 2015year


United States

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