Research Discussion Paper – RDP 2018-10 Wage Growth Puzzles and Technology

Economists have been grappling with both a long-run and a shorter-run wage 'puzzle'. The long-run wage puzzle is why real wages have for decades been growing slower than labour productivity: that is, why the labour share of national income has been falling. The shorter-run puzzle is why nominal wages have for some years been growing slower than model-based forecasts have predicted.

This paper suggests that an important part of the explanation for both puzzles may lie at the individual firm level, rather than at the macro level. The uneven take-up of new technology is resulting in increasing dispersion in productivity performance across firms in a given industry. High productivity firms would appear to be using most of their higher levels of productivity to reduce prices and increase profit margins rather than passing most of it on to their workforce in higher wages, while the productivity 'laggards' have limited scope to pay higher wages. If employment growth is much less dispersed than productivity growth across firms, as overseas evidence suggests is the case, these observations may help to explain not just declining labour shares of national income but also low average productivity growth and subdued nominal wages growth. The paper sets out some research proposals designed to further explore these linkages.

Given the broadening application across industries of new information and communication technology, if the above forces are indeed at play they may prove pervasive and long lasting, with important implications for monetary policy over the cycle.