SPRU - Science Policy Research Unit

Local Distribution of productivity Gains: heterogeneous Effects (LODGE)

The ‘Local Distribution of productivity Gains: heterogeneous Effects’ (LODGE) project examines the effect of firm labour productivity changes on wages in the UK, particularly on low-paid occupations and low-skilled workers in local labour markets. The research team will also examine the effect these changes have on the composition of local employment across a variety of occupations and skills.

Led by Professor Maria Savona (PI), with Dr Tommaso Ciarli (Co-I) and Dr Edgar Salgado Chávez, and funded by the Joseph Rowntree Foundation, the project will build on data and findings from the ESRC-funded TEMPIS project (‘Technical change, Employment & Inequality: A Spatial analysis of households & plant data’) as well as the ISIGrowth project.

Context

Existing theory suggests a correlation between labour productivity and wages. However, wage determination differs across sectors, occupations, workers’ characteristics and institutions (e.g. unionisation). There are also significant variations between countries: since 2008, wages in the UK have not fallen in correlation with Total Factor Productivity (TFP), while those in the US have fallen (with a smaller adjustment of employment). The link between wage and labour productivity has also been shown to change over time – since the 1970s, wage and productivity growth rates have diverged. In the current context of declining productivity in the UK and gloomy forecasts on future trends post-Brexit, the project aims to identify which workers are being hit the hardest.

The composition of labour has changed dramatically over the last three decades. New technologies have changed the composition of tasks, access to employment, and the distribution of wages, reducing on average the share of labour in output. In the UK, decreasing wages combined with an unchanged average number of working hours suggest an increase in the share of low-paid employment since the early 1990s. This evidence is very specific to local labour markets with different concentrations of routinized workforce.

Methodology

Building on a literature review on the relation between innovation, firm productivity, and wages, the project will develop a conceptual framework that combines the relation between productivity and wage at the level of the firm, sector, and local labour market. It will then implement an instrumental strategy to test the effect of increases in firm, sector, and local productivity on wages across occupations and age groups.

Impact and Outreach

With the UK Government’s Industrial Strategy White Paper (published 27 November 2017) headlining that it “will create an economy that boosts productivity and earning power throughout the UK”, the findings of the LODGE project are likely to prove more pertinent than ever. Through looking at different categories of workers – especially those in low-income and low-skilled employment – the research aims to reveal the distributional effects of the productivity increases that this strategy is keen on pursuing.

In close collaboration with the Joseph Rowntree Foundation, the LODGE project will produce a policy report for dissemination across academic and non-academic networks and media channels. It aims to inform and influence policymakers in both local and national government and other stakeholders (including employers, trade unions, think tanks and the third sector) with an interest in innovation and social policy.

The project findings will provide an insight into the real-world problems of increasing poverty and inequality across the UK. A concerted strategy of reshaped industrial, innovation and education policies could foster productivity-enhancing technical change, reduce wage gaps and make local labour markets more inclusive.