Worker productivity and wages relationship

The relation between labor productivity and wages in Brazil:

worker productivity and wages relationship

Over this period, the pay (wages and benefits) of typical workers rose in tandem with productivity (how much workers produce per hour). In other words, as the. International Labour Office Inclusive Labour Markets, Labour Relations and Working Conditions Branch. wages / labour productivity / measurement. Finally, this paper is only a theoretical review on the relationship between wages and Labor. Productivity in Industries. Keywords: Labour productivity, Marginal.

In light of the theoretical importance of labor productivity to wage growth and economic development, this study examines the relation between productivity and wages in Brazil between and The first stage is characterized by stagnation in productivity and real wages, while the second stage is marked by modest growth in productivity and significant growth of real wages Maia; Menezes, ; IPEA, Importantly, these overall trends disguise broad variation in productivity and wage growth at the sectoral level.

Other areas, such as agriculture, have experienced rapid productivity growth and substantial wage gains Gasques et al. These evolving dynamics complicate traditional notions of development via industrialization, and suggest alternative sectoral priorities and strategies Baiardi, Motivated by these changing dynamics, this study adopts a sectoral perspective in order to address the following questions: This sectoral perspective complements previous analyses that examine labor productivity and income in Brazil on a national level Romanatto et al.

We find a universally positive association between labor productivity and real wages.

The Productivity–Pay Gap

More specifically, our estimates indicate that elasticity between labor productivity and real wages is largest for sectors where earnings are directly based on productivity such as pay-on-commission in real estate and commerceor where productivity is easily measured industry. In turn, elasticities are smaller for those sectors where worker productivity is more difficult for firms to measure, or where there are high levels of informal labor agriculture and construction. Furthermore, results indicate that wages in many sectors are also strongly influenced by institutional forces, such as worker formalization, labor unions, and minimum wage.

The study is organized as follows. Part 2 explores theoretical explanations of the frequently observed divergence between labor productivity and wages and situates this debate in the Brazilian context.

Part 3 reviews the methodology and data used to compute labor productivity and real wages for eight sectors of the Brazilian economy between andand then develops regression models to estimate productivity-wage elasticities for each sector. Part 4 presents data series on sectoral labor productivity and real wages, as well as regression results, and interprets these data and results in light of recent economic developments in Brazil.

The Connection between Labour Productivity and Wages – Economica

Finally, Part 5 offers conclusions. Under perfect competition, a market wage below productivity would induce the firm to hire workers until their marginal product fell below the wage rate under the assumption of diminishing marginal returns. There are a number of theoretical explanations for why wages rarely equate to productivity levels in practice. Firstly, wages account for only a fraction of total employee compensation, which may include additional benefits such as pension or insurance.

If the proportion of these additional benefits in total compensation grows, then stagnating real wages could actually disguise an increase in overall employee compensation Feldstein, In Brazil, where formal employee benefits such as a 13th salary, severance pay, and health insurance are prevalent, recent increases in worker formalization could make this factor a significant determinant of productivity-wage divergence IPEA, Thirdly, firms may systematically discriminate against workers based on race, gender, or other characteristics, imposing wage penalties on discriminated workers who are equally as productive as their non-discriminated colleagues Blau; Kahn, ; Sakamoto; Kim, ; Fryer Jr.

I then describe the economic theory of how wages are determined within industries and occupations. In a third section, I contrast that theory with the theory of national wage determination. Finally, I present some recent statistical data concerning the relationship between the rate of growth of productivity and the rate of growth of wages at the industry level in Canada. Labour productivity, or output per hour of work, is then found by dividing the real output index by the number of hours worked by individuals in that industry.

If clothing workers worked million hours in both andfor example, output per worker hour would be found to have increased from 8. Note that there is no connection between revenues per worker and output per worker. It is quite possible, for example, for revenue to rise because prices have risen while labour productivity has remained unchanged.

Conversely, even if output per worker has risen substantially, if prices have fallen revenue per worker may have remained constant or even fallen. Theory — Industry Wage Levels Those who believe that there is a connection between labour productivity and wages within an industry or occupation implicitly assume the following: As wages are determined by supply and demand, an increase in demand will imply an increase in wages.

worker productivity and wages relationship

First, there is no necessary connection between output per worker and revenue per worker. Hence, even if output per worker rises, revenue per worker may fall. Furthermore, when output per worker increases, the industry will have to sell additional units of output; that is, industry supply will rise.

But, by the laws of supply and demand, when supply increases, prices decrease. That is, the increase in worker productivity may cause a decrease in prices. In some cases, this decrease in prices is so extreme that an increase in worker productivity may actually cause a decrease in revenue per worker.

worker productivity and wages relationship

The clearest example of this phenomenon has occurred in agriculture, where farm incomes are under constant downward pressure even though productivity gains have been greater in that sector than in most other industries.

Second, even if an increase in labour productivity does lead to an increase in revenues generated per worker, it is not necessarily the case that the consequent increase in demand will be associated with a long run increase in wages relative to other industries.

worker productivity and wages relationship

The reason for this is that, in the long run, additional workers can be supplied to that industry, which offsets the upward pressure on wages. Rather, it is employment in the high productivity industry that will rise relative to employment in other industries. Assume, for example, that there is a large group of workers who would be approximately indifferent between working as plumbers, carpenters, and electricians.

Assume also that, initially, all three receive the same wage rate. Now, if productivity rises among electricians, there will be an increase in demand for electricians.

In the short run, say a year or two, it will not be possible to train additional electricians and wages may be bid up. But, when wages are higher among electricians than among plumbers and carpenters, students graduating from high school will prefer to train as electricians.

Soon, the supply of new electricians will increase and the supply of new carpenters and plumbers will decrease. Wages will fall among electricians and will rise among plumbers and carpenters.

worker productivity and wages relationship

Ultimately, the wages of all three occupations will equalize. All three will enjoy higher wages than they did initially. But, among plumbers and carpenters this will have occurred without any increase in productivity.