Abstract
This paper examines, based on desk research, the dynamic relationship between productivity growth and its impact on labor markets and economic expansion. It specifically focuses on overall worker compensation and employment levels, and then the effects of the preceding on economic expansion. While classic economic theory posits a link between productivity gains and wage growth, recent evidence demonstrates a significant divergence between the two variables. Over the past almost 50 years, productivity has climbed, albeit at varying rates over time, without corresponding increases in pay. In fact, the productivity-pay gap has widened considerably. Several factors have emerged that could explain this gap: increasing pay inequality, a rising capital share, monopsony power, and globalization. All of these have contributed to the widening productivity-pay gap. The analysis underscores the significance of government policy intervention to maintain fairness in the labor market. Such policies could include strengthening collective bargaining, supporting displaced worker retraining, mitigating market power, and raising minimum wages, in addition to understanding the role of AI. It is imperative to comprehend the transmission mechanisms from productivity to pay in order to address labor market inequality and foster inclusive economic growth.