By James Pethokoukis

It may be nearly a year until the next Thanksgiving, but that doesn’t mean we can’t be thankful for the blessings of economic growth all year round. The annoying shortages in the global supply chain give a small hint of what it’s like when an economy isn’t working the way it should. (Indeed, Omicron-related drags on “reopening and goods supply” have led the bank to trim its US GDP forecast to 3.8 percent versus 4.2 percent previously.)

But given the importance of economic growth, clearly spelling out the benefits is important. It’s not just about making “the line go up” as they sometimes put it on Twitter. It’s about improving living standards, increasing opportunity, and providing the resources to tackle big problems. As economist John Van Reenen wrote earlier this year:

Growth is not simply getting bigger. Increasing GDP by having a bigger population, or increasing working hours, is not obviously a desirable thing. What we need is productivity growth. Productivity measures how much more output can be generated per input, for example GDP per hour worked. History shows us that wage growth follows productivity growth over the long run. More productivity is like growing the economic pie: it gives us choices to spend more on public service, environmental protection, redistribution or private goods.

(Please check out a podcast chat I had with Van Reenen in 2020 for my “Political Economy” podcast.)

But does economic growth and increased worker productivity really translate into higher incomes? That question is the subject of the new NBER working paper “Productivity and Pay in the US and Canada” by Jacob Greenspon (Harvard), Anna M. Stansbury (MIT), and Lawrence H. Summers (Harvard). From the paper (bold by me):

We study the productivity-pay relationship in the United States and Canada along two dimensions. The first is divergence: the degree to which the levels of productivity and pay have diverged. The second is delinkage: the degree to which incremental increases in the rate of productivity growth translate into incremental increases in the rate of growth of pay, holding all else equal. We show that in both countries the pay of typical workers has diverged substantially from average labor productivity over recent decades, driven by both rising labor income inequality and a declining labor share of income. Even as the levels of productivity and pay have grown further apart, we find evidence for some linkage between productivity and pay in both countries: a one percentage point increase in the rate of productivity growth is associated with a positive increase in the rate of pay growth, holding all else equal. This linkage appears stronger in the US than in Canada. Overall, our findings lead us to tentatively conclude that policies or trends which lead to incremental increases in productivity growth, particularly in large relatively closed economies like the USA, will tend to raise middle class incomes. At the same time, other factors orthogonal to productivity growth have been driving productivity and typical pay further apart, emphasizing that much of the evolution in middle class living standards will depend on measures bearing on relative incomes.

And what might those “other factors” — the ones pushing apart productivity and pay — be? Again, from the paper: “In the US, the decline in the labor share has been the subject of a great deal of research, and is attributed variously to technological changes, globalization and labor offshoring, reductions in worker bargaining power, higher firm concentration, increased markups, and housing market dynamics (see overview in Stansbury and Summers, 2020).”

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