Productivity puzzles Speech given by Andrew G Haldane, Chief Economist, Bank of England  London School of Economics 20 March 2017  The views are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Sandra Batten, Shiv Chowla, Fergus Cumming, Adriana Fernandes, Jeremy Franklin, Dena Jacobs, Gabor Pinter, Alex (Sasha) Naumov and Jessica Verlander for their help in preparing the text. I would like to thank Omar Ahmed, Saleem Bahaj, Giuseppe Berlingieri, Phillip Bond, Sara Calligaris, Greg Clark, Chiara Criscuolo, Angus Foulis, Peter Gal, Richard Harrison, David Hendry, Bill Janeway, Casey Murphy, Lukasz Rachel, John Van Reenen, Michael Saunders, Patrick Schneider and colleagues at the ONS Research Database for their comments and contributions. 1  All speeches are available online at www.bankofengland.co.uk/speeches  By common assent, economists do not agree on much. I have lost count of the number of jokes about economists whose punchline ends “and they still couldn’t reach a conclusion”. That is why Harry S Truman, when President of the United States, famously yearned for a one-handed economist. Whether or not this critique is fair, the issue I will discuss tonight is one on which economists do agree: productivity matters.
The reason for this is that a significant part of firm-specific variation in productivity is absorbed by firms in their profits or reflected in their prices. The reason is that firms’ profits and prices absorb a significant part of firm-specific variation in productivity. Many of the workers in the more productive tail of firms are being underpaid relative to their average productivity, which results in frontier firms making a larger profit share. The opposite is the case at the other end of the productivity distribution. 55  For example, Furman and Orszag (2016) There is time series evidence to suggest a strong historical relationship between aggregate productivity and real wages. For example, Castle and Hendry, Blundell et al (2013) and Disney et al (2013). 56  17  All speeches are available online at www.bankofengland.co.uk/speeches  17  57  This analysis focusses on differences in pay across firms. But what about pay within firms? We can  examine this by tracking differences between the average pay in each company and the pay of their highest paid director. Chart 28 plots the median across firms of these series over time, while Chart 29 compares the variance of each series as well as the gap between average pay and the highest paid director. Since 1998, the variance in average pay and director pay has increased across firms, although it has fallen notably since the financial crisis. The median gap between average pay and director pay has followed a similar pattern.