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The Productivity-Welfare Linkage: A Decomposition

Author

Listed:
  • Nicholas Oulton

    (Centre for Macroeconomics (CFM)
    National Institute of Economic and Social Research (NIESR))

Abstract
According to Paul Krugman (1994, chapter 1), “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” But productivity and the standard of living are different concepts and are measured in different ways, so the question is, what is the linkage between them? Productivity is typically measured by GDP per hour. The standard of living has potentially many aspects such as health, longevity, personal security, and relationships. But here I take a narrower view and stick to the national accounts. So the standard of living is measured by the household disposable income of the median individual. I use the median rather than the mean so that inequality is taken into account. I develop a decomposition of the growth of median household income which relates it to the growth of productivity via eight additional factors, one of which is inequality; four other factors are measures of labour market performance. I apply this decomposition to the UK over the period 1977 to 2019. I find that productivity growth was far and away the most important factor in accounting for the growth of living standards which was substantial up to 2007; rising inequality prior to 2007 retarded the growth of living standards but not by much. Since 2007 productivity growth has collapsed as has also the growth of living standards. The fall in the latter has been mitigated a bit by a fall in inequality.

Suggested Citation

  • Nicholas Oulton, 2022. "The Productivity-Welfare Linkage: A Decomposition," Discussion Papers 2205, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2205
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    References listed on IDEAS

    as
    1. Nicholas Oulton, 2012. "Hooray for GDP!," CEP Occasional Papers 30, Centre for Economic Performance, LSE.
    2. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2022. "Productivity and the Welfare of Nations," Journal of the European Economic Association, European Economic Association, vol. 20(4), pages 1647-1682.
    3. Andreas Teichgraber & John Van Reenen, 2021. "Have Productivity and Pay Decoupled in the UK?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 41, pages 31-60, Fall.
    4. Charles I. Jones & Peter J. Klenow, 2016. "Beyond GDP? Welfare across Countries and Time," American Economic Review, American Economic Association, vol. 106(9), pages 2426-2457, September.
    5. Basu, Susanto & Fernald, John G., 2002. "Aggregate productivity and aggregate technology," European Economic Review, Elsevier, vol. 46(6), pages 963-991, June.
    6. Martin L. Weitzman, 1976. "On the Welfare Significance of National Product in a Dynamic Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(1), pages 156-162.
    7. Nicholas Oulton, 2019. "The UK and Western Productivity Puzzle: Does Arthur Lewis Hold the Key?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 36, pages 110-141, Spring.
    8. Nicholas Oulton, 2018. "GDP and the System of National Accounts: Past, Present and Future," Discussion Papers 1802, Centre for Macroeconomics (CFM), revised Jun 2018.
    9. J. A. Sefton & M. R. Weale, 2006. "The Concept of Income in a General Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 219-249.
    10. Nicholas Oulton, 2021. "The effect of changes in the terms of trade on GDP and welfare: a Divisia approach to the SNA," Discussion Papers 2126, Centre for Macroeconomics (CFM).
    11. Grace Anyaegbu, 2010. "Using the OECD equivalence scale in taxes and benefits analysis," Economic & Labour Market Review, Palgrave Macmillan;Office for National Statistics, vol. 4(1), pages 49-54, January.
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    More about this item

    Keywords

    Productivity; standard of living; welfare; inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts

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