Do Increases in Labor Productivity Still Drive Wage Growth?

The rise of earnings inequality in the United States has garnered attention in both the political and academic spheres. Recently progressive politicians have pointed towards the divergence of wages and labor productivity as a source of this inequality. known as the productivity-pay gap as a source of the rise in inequality. This paper analyzes that divergence with a regression model that evaluates the change in compensation that is attributable to increases in productivity. Results were somewhat surprising with productivity accounting for a larger portion of the growth in wages for the period after 1972 when the divergence in the two growth rates began than in the time between 1948 and 1972 when they were said to grow together. Additionally, results showed more wage growth was attributable to increases in productivity in goods producing sectors like manufacturing, utilities, and construction than financial intermediation in the services sector. However standard errors across our model were relatively large making it difficult to say with certainty the size of effects observed. Future research should seek to better define productivity in the service sector to determine whether other factors like education, occupation or area of residence affect the level of wage growth attributable to compensation