The Link Between Wages and Productivity Is Strong

Much of the public debate in recent years suggests that wages are not primarily determined by productivity. Indeed, the argument that the link between compensation and productivity has been effectively severed is commonly made. In this paper, I first discuss the wage-setting process and the conceptual issues that are of critical importance to any empirical investigation of the link between compensation and productivity. I then highlight some recent evidence suggesting that, contrary to the current narrative in some policy circles, the link between productivity and wages is strong.