London School of Economics and Political Science: Wages of typical UK employee have become decoupled from productivity

Pay has fallen behind economic growth in the UK over the past four decades, a new report launched today shows.

The report “Have productivity and pay decoupled in the UK?” published by the London School of Economics’ Programme on Innovation and Diffusion (POID) shows that between 1981 and 2019, prior to the Covid-19 hit, productivity rose by 87 per cent but median employee wages only rose by 62 per cent: a 25 percentage point “overall decoupling” between productivity growth and median wage growth.

Three-fifths of this gap is explained by the growth of inequality which widened the wedge between mean and median employee wages. A further third is due to the increase in non-wage labour costs, in particular the growth of employer pension contributions.

So although average(mean) employee compensation, covering wages and other benefits, has kept pace with productivity – the decoupling of productivity and median wages means that the typical worker may not feel much benefit.

The self-employed have done even worse than other workers. Since 1981, average employee compensation has grown 30 percentage points more than the average income of the self-employed, with this gap opening up most in the early 2000s.

The main cause of the falling fortunes of self-employed is the rise of people working for themselves, but employing no workers – the solo self-employed, who earn less on average than other self-employed workers. This group accounted for 85 per cent of the self-employed in 2019, up from 73 per cent in 1997.

“UK productivity growth has been pitiful over the last 14 years, and this has been a major cause of low average wages. We urgently need to tackle this productivity challenge if we want to get back to sustainable earnings growth,” said Professor John Van Reenen, report co-author.

“The solo self-employed have really suffered as a group in the last two decades,” adds co-author Andreas Teichgraeber. “Politicians cannot afford to ignore this growing part of the workforce.”

The Inquiry is a collaboration between the Resolution Foundation and the LSE, funded by the Nuffield Foundation.

The report “Have productivity and pay decoupled in the UK?” is published by The Programme on Innovation and Diffusion (POID).

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