What is economic productivity and why don't wages grow equally?
Productivity measures how much is produced per hour, but wages depend on more factors than it does.
Productivity is a frequent word in debates about the economy, but not always well explained. In simple terms, it is a measure of how much is produced with a given amount of resources, usually per hour worked. This analysis compares explanations for the question: if productivity grows, why do wages not always grow by the same amount?
What it is
Labor productivity is usually calculated as the value produced divided by hours worked. It can grow with technology, machines, work organization, workers' skills and process improvements. There are also productivity measures that consider several factors at once.
Scenarios and explanations
- Distribution of gains. Part of the productivity gain may go to profits, investment or lower prices, rather than to wages.
- Bargaining power. The ability of workers and firms to negotiate influences how gains are divided.
- Differences between sectors. Productivity can grow fast in some sectors and little in others, while wages tend to influence each other across sectors.
- Inflation and prices. Wages may rise in nominal terms but lose purchasing power.
- Composition of employment. Changes in the types of jobs, such as more jobs in lower-paid services, change the average.
- Measurement problems. Measuring productivity in services, remote work or digital products is hard.
Criteria for assessing a claim
- Which productivity is meant? Per hour, per worker, of one sector or of the whole economy.
- What period is compared?
- Are wages in real terms? After subtracting inflation.
- Are there other factors? Profits, taxes, benefits.
- What are the data sources?
Strengths and limits
Productivity is a useful indicator, but it does not explain income on its own. Wages depend on institutions, laws, negotiation and market conditions. Blaming a single factor tends to oversimplify.
A simple reading matrix
When reading a news story, ask: what was measured, over what period, in real or nominal terms, for which group and which factors were considered. If answers are missing, treat the conclusion with caution.
Sources
Consult statistics institutes, central banks and international economic bodies, noting methodology and date.
