Income thresholds and the productivity–wage nexus: evidence from dynamic panel data

Abstract Real wages shape the employment market, while productivity drives the real economy. Understanding how these two forces interact is crucial for both policymakers and economists. This study empirically investigates the relationship between real wages and productivity for a panel of 34 developed and developing countries using annual data from 1998 to 2022. Using a two-step approach, firstly, a static panel threshold model is employed to uncover potential nonlinearities in the wage-productivity link. Building on this, a dynamic panel threshold regression model proposed by Seo and Shin (in J Econmtr, 195: 169-186, 2016), using GDP per capita as a threshold to differentiate countries by development level. Our findings reveal striking threshold effects: in lower-income countries, productivity gains translate only modestly into higher real wages, whereas in wealthier nations, the impact of productivity on wages is substantially stronger. These results suggest that economic development increases the sensitivity of wages to productivity gains, with crucial implications for labor market and wage setting policies.