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1 1 (January 11, 2023)

handle is hein.crs/govekej0001 and id is 1 raw text is: Congressional R fesearch SerVice Recent Trends in Wages and Productivity January 11, 2023 Productivity growth is an important determinant in long-term wage growth. In 2022, labor productivity growth and real wage growth have been negative, a concern for many policymakers. This CRS Insight discusses the theoretical relationship between productivity and wages and the historical and recent trends of the two. For more information about recent wage trends, see CRS Report R47380, Average Wage Growth and Related Economic Trends in 2022, by Lida R. Weinstock. The Relationship Between Wages and Productivity In economic theory, wages are equal to the marginal product of labor-the added output from the last worker hired. In other words, employers set wages for workers based on how much those workers individually produce. Historically, the relationship has not been close economy-wide in the short run. To measure the productivity of labor, the Bureau of Labor Statistics (BLS) calculates the amount of output produced per worker per hour worked. Productivity increases allow for more goods and services to be produced using the same amount of labor. In theory, an increase in productivity may result in an increase in wages, all else equal. For example, if a worker generates $10 of revenue per hour, the employer may be willing to pay up to $10 per hour. If that worker becomes more productive and generates $11 of revenue per hour, the employer's willingness to pay may increase up to $11 per hour as well. Therefore, increases in real wages that occur in tandem with increases in labor productivity are generally viewed as more sustainable than those that are not. Since productivity increases allow for increased output (and revenue) per unit of labor, a corresponding real wage increase would not be expected to push up inflation. Rather, productivity helps maintain business net revenue without raising prices. However, if real wage growth outstrips productivity growth, workers would be paid more than they add to their employers' output and revenue, causing the employers' costs to increase, which may result in increasing prices. Historical Trends Most economists agree that until the 1970s, productivity and pay trends were closely correlated. However, there is disagreement about whether productivity and pay trends began to diverge at that point, with productivity growing faster than real wages, often referred to as the productivity-pay gap. Much of the disagreement comes down to methodology for analyzing these trends. There are several different measures of productivity, pay, and inflation that can be used in determining trends in productivity and pay Congressional Research Service https://crsreports.congress.gov IN12076 CRS INSIGHT Prepared for Members and Committees of Congress

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