Do Wages Follow Productivity? Evidence from European Countries

Abstract Economic theory assumes that factors are paid according to their marginal productivity, however the empirical validity of this hypothesis has been questioned in some of the literature. We use data from Eurostat to examine the changes of labour remuneration and labour productivity during the period 2004-2020 in a panel of European countries. The results from the panel regression analysis confirm that in general there is a strong link between labour productivity and the compensation of employees. However, exploratory analysis shows that the sample is characterized with internal heterogeneity. Growth is higher in Central and Eastern Europe and for some countries from the region there is decoupling of productivity and labour remuneration. The latter has seen stronger growth, with the exception of Romania, where in real terms productivity has been growing faster than wages. Possible explanations of the decoupling are catching up and convergence, integration in the world economy, factor mobility, difference in labour market institutions and excessive labour demand, but the present research is inconclusive.