Association for Public Policy Analysis & Management

This contribution will focus on the drivers of the ‘decoupling’ that has occurred over the last decade or so between growth in productivity and typical pay. In keeping with a number of other advanced economies the UK has experienced a period in which median wage gains have failed to keep pace with economic growth, but the drivers of the UK ‘wedge’ have differed from those evident in other countries such as the US. Using National Accounts data, this work provides a decomposition of UK decoupling in order to quantify the relative importance of changes in the labour share, increases in non-wage compensation such as pension contributions, wage inequality and deflator effects. By updating previous work in this area to cover the post-crisis period of economic recovery it provides a useful indication on what if anything has altered in the relationship between pay and productivity over time. By highlighting the potential role being played in the UK context by allocation of employee compensation to defined benefit pension deficits associated with those already in or approaching retirement, the work touches not just on earnings inequality and issues of labour bargaining power, but on intergenerational equity too. From a policy perspective it points to the need for new forms of support for younger cohorts that face disadvantage relative to the baby boomer generation in terms of access to free higher education, pension provision, home ownership and –potentially – pay growth.