Wage costs and productivity in manufacturing: Their relationship over time and the situation today | Study

Wage costs and productivity in manufacturing: Their relationship over time and the situation today | Study


Nikos Solomitros | Economist, KEFiM’s research associate

Constantinos Saravakos | KEFiM’s researcher

The research examines the evolution of the association between wages (compensation per employee) and productivity (gross value added at current prices per employee) in the manufacturing sector in Greece, aiming to conclude on the effect of this relationship on the competitiveness and the development prospects of the sector.

The above relationship is analyzed annually from 1960 (first year of available data) to 2018. For better understanding the association between wages and productivity, thw study also explores and compares the relationship in 7 other countries Denmark, Germany, Italy, France, Finland, Norway and Austria.

Key findings:

  • The greater increase in wageσ versus productivity in manufacturing, mainly during the 1980s, combined with the increase in government intervention was a catalyst for the deindustrialisation of Greece and the unilateral shift of the production model in the services sector, especially at a time where other European Countries of the common market have significantly reduced interventionism and improved the business environment.
  • Wages are not currently a disincentive to growth in the manufacturing sector, as from 2013 onwards the productivity of the sector is growing faster than wage costs. Non-wage costs (taxes and social contributions) and the anti-growth regulatory environment remain obstacles.
  • With the onset of the crisis, manufacturing productivity plummeted while wage costs initially remained relatively stable, reducing employment in manufacture by 33% and the number of enterprises by 28%. The subsequent reduction of wages could not contribute to the halt of deindustrialisation due to the other structural problems of the Greek economy.
  • During the period 1960-2018, wages in Greece increased annually by an average of 11% more than productivity. Wages and productivity have the weakest connection in Greece compared to all the other countries examined in the study. 
  • The disconnection of wages and productivity peaked in Greece during the period 1981-2000, when wages increased by an annual average of 27% more than productivity. Especially in 1982 and 1997, this difference reached 38%.