Explaining the Rising Wage-Productivity Gap of the 1980s: Effects of Declining Employment and Unionization

Abstract

This paper investigates causes of the dramatic increase in the wage-productivity gap—the divergence between the growth rates of aggregate productivity and real wages - in the post-1981 period. Using a two-step estimation procedure which incorporates three-digit industry wage regression coefficients into an aggregate wage growth identity equation, it finds that employment decline within unionized industries explains 18% of the post-1981 increase in the gap and that declining union ability to raise wages may explain as much as another 25%. Imports, on the other hand, do not appear to explain the gap independently of employment effects.