The decoupling between labour compensation and productivity in high-income countries: Why is the nexus broken?

During the last decades, mature economies have tended to experience a divergence between labour compensation and productivity growth. Interpretations of this trend are still under debate. Our article aims at contributing to a sound, evidence-based understanding. We estimate the magnitude of this decoupling for a panel of 22 high-income economies (1970–2018) and empirically assess the role of a variety of factors. After providing evidence that casts doubt on the impact of technical change, we adopt a ‘political economy’ standpoint and focus on the structural effects on real compensation growth of several macroeconomic and institutional dimensions. Our findings indicate that labour market slack and the weakening of pro-labour institutions have acted as important wage-squeezing factors. A negative effect is also found for trade openness and international capital mobility, while most financialization variables are not significant. The robustness of our results is supported by a range of tests and specifications.