The relation between productivity and compensation

03  December 2018    5:00 pm CET

Paolo Pasimeni, Senior Research Associate at the Institute for European Studies (IES) of the Vrije Universiteit Brussel (VUB)


wiiw, Rahlgasse 3, 1060 Vienna, lecture hall (entrance from the ground floor)


One of the classical problems of political economy has been to understand the relation between labour compensation and labour productivity; in more recent years wage growth has become a key concern for the conduct of monetary policy by major central banks. This work tries to measure to what extent increases in productivity translate into increases in compensations. While previous studies had investigated this relation in the case of the US, this work enlarges the scope of the analysis to a set of 34 advanced economies over the past half century. The results show on average a significant link between growth in productivity and growth in compensation, however there is no one-to-one relation, there is instead a significant gap. Cyclical conditions as well as labour market structures greatly affect this relation. These findings imply that policies aiming at increasing productivity are a necessary but not sufficient condition to achieve also appropriate pay growth, because other factors intervene to weaken the link between the two. Although this topic has gained more prominence in the US, the analysis shows that these findings apply to the EU and to other advanced economies as well. Finally, to the extent that the gap between productivity and compensation affects aggregate demand, understanding it is crucial for the conduct of macroeconomic policies.

Dr. Paolo Pasimeni is an economist, specialised in international macroeconomics, with experience in research and policy making. His main field of expertise is the macroeconomic analysis of the euro area, covering fiscal, monetary and structural policies; he works on the architecture of the European economic and monetary union (EMU), and in particular on the design of options for institutional reforms of EMU. He has also been working on labour market analysis, as well as on inequalities, on the analysis and conception of the EU budget, on cohesion policy and on research and innovation. He started his career as a researcher on the Italian industrial districts (2000), then as a market analyst in Millward Brown (2001-2002). In 2002 he was economic analyst in the Italian Embassy in Cuba; then he became associate researcher at the Spanish Council for Scientific Research (CSIC), where he specialised on research policies and innovation systems (2003-2006). Since 2006 he has been working as an economic analyst in several departments of the European Commission: Regional Policy, Employment and Social Affairs, Budget, and Economic and Financial Affairs. Since 2017 he is Senior Associate Researcher at the Institute for European Studies (IES) of the Vrije Universiteit Brussel (VUB). He holds a PhD and MPhil in applied economics from the University of Seville (Spain) and a MSc in economics from the University of Modena (Italy).