Several OECD countries have been grappling not only with slow productivity growth but have also experienced a slowdown in real average wage growth relative to productivity growth, which has been reflected in a falling share of wages in GDP. At the same time, growth in low and median wages has been lagging behind average wage growth, contributing to rising wage inequality. Together, these developments have resulted in the decoupling of growth in low and median wages from growth in productivity. This chapter takes stock of recent OECD research on the drivers of wage-productivity decoupling and discusses implications for public policies. The main results can be summarised as follows: 1. In a number of countries, decoupling has gone together with real median wage stagnation. In the United States, for instance, annual real median wage growth over the past two decades has been around 1/2 per cent whereas it has been between 1(1/2) and 2 per cent in countries with similar productivity growth but no decoupling, such as France, Finland and the United Kingdom. 2. Technological progress and the expansion of global value chains have contributed to the decoupling of real median wage growth from productivity growth, but there have been significant differences in firm dynamics across countries. Where real median wage growth has decoupled from labour productivity growth, firms at the technological frontier with low labour shares have pulled away from the remaining firms. The rise of the former firms has been accompanied by high productivity growth and large turnover at the technological frontier, suggesting that it reflects mainly technological dynamism. 3. Public policies and institutions are important determinants of the link between productivity and wages. Investment in skills can ensure that the gains from technological progress are broadly shared with workers because capital is less easily substitutable for high-skilled labour as prices for new technologies fall. At the same time, active labour market policies play a useful role in preserving the labour market attachment and skills of workers who lose their jobs. Competition-friendly product market reforms can promote the transmission of productivity gains to wages by compressing product market rents that tend to accrue to capital but may lead to higher wage inequality by raising productivity and wage dispersion across firms. Where minimum wages are low or employment protection rules are particularly weak for some workers, raising minimum wages or strengthening employment protection for these workers could offset adverse effects of product market reform on wage inequality. However, where minimum wages are binding for a large share of workers and employment protection rules are strict, such measures risk triggering the substitution of capital for labour. The remainder of the chapter is organised as follows. The next section describes the conceptual framework for breaking down the decoupling of real median wages from productivity into contributions from labour share and wage inequality developments. It also provides descriptive evidence on decoupling for the covered OECD countries based on aggregate data (Schwellnus et al., 2017). The following section summarises the results from OECD country, industry and firm-level studies on the effects of structural trends and policy developments for the transmission of productivity gains to real median wages, with a special emphasis on recent firm dynamics (Berlingieri et al., 2017; Pak and Schwellnus, 2018; Schwellnus et al., 2018).
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