Wage inequality and productivity growth: motivating carrots and crippling sticks

Working paper

Wage inequality is a particular focus of attention not only in public debates over the need for social regulation to support equity, but those over the implications of social regulation for productive performance. The present paper employs panel techniques to examine the comparative historical relationship between wage inequality and hourly labour productivity growth in the manufacturing sectors of nine advanced industrialised nations over the period 1970-1995. The results show that whilst greater inequality in the top half of the wage distribution is associated with greater productivity growth, greater inequality in the bottom half is associated with lower productivity growth. It appears that whilst wage inequality in the top half of the distribution productively motivates higher earners, wage inequality in the bottom half of the distribution is detrimental for productivity performance. The latter result is most likely attributable to the weak incentives to reorganise production where extremely low pay is feasible.

Authors: Rogers, M; Vernon, G

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: ESRC Centre on Skills, Knowledge and Organisational Performance (SKOPE)
• Series: SKOPE Research Paper
• Place of publication: http://www.skope.ox.ac.uk/publications
• Publication date: 2002-01-01
• Edition: Publisher's version
• ISSN: 1644-1535
• Paper number: 40, Spring 2002
• Language: English
• Keywords: JEL:J31; wage inequality; skill biased technical change; productivity growth; human capital; institutions; JEL:O40
• Subjects: Education; Economics and education