Have Productivity and Pay Decoupled in the UK?

In the long-run at the macro level, the growth in real pay of workers tends to follow that of labour productivity. In recent years, however, there have been concerns that this relationship has broken down and that pay has become “decoupled” from productivity, growing much more slowly, and leading to a fall in the labour share. This has been a welldocumented phenomenon in the United States (US) since the early 1980s. By contrast, we show that in the United Kingdom (UK), employee mean hourly compensation has grown at the same rate as labour productivity between 1981 and 2019. However, there has been a divergence between median employee hourly wage growth and productivity growth of about 25 percentage points. About three-fifths of this “overall decoupling” is due to increasing inequality (mean wages growing faster than median wages) and one-third is due to the increased non-wage compensation costs, in particular employer pension contributions. However, this analysis relates to employee compensation. The average self-employed worker has seen their income grow by only 50 per cent, compared to 80 per cent for the average employee. Using micro-data, we show that this gap can essentially be explained by (i) the growth in the numbers of “solo self- employed” (who have relatively low incomes), and (ii) a much greater fall in hours worked by the self-employed than for the employed. Finally, if we “correct” the labour share for self- employment and non-wage labour costs, the UK labour share has fallen by about 3.5 percentage points over the last four decades.