The productivity paradox in North Macedonia: Why growing firms don’t always pay more

A widely accepted principle in economics is that higher productivity leads to higher wages and, ultimately, firm growth. The logic is straightforward: firms that generate more output per worker can afford to pay better wages while remaining competitive and profitable. This link between productivity and wages is well documented across contexts, including the US (Feldstein, 2008; Stansbury and Summers, 2018), the UK (Teichgraeber & Van Reenen, 2021), and Romania (Herman, 2020).

Something interesting is happening in North Macedonia’s economy. Since the pandemic, labor productivity, measured as firm operational revenues net of material costs divided by employment, has been on the rise across both manufacturing and services. At first glance, this seems like a positive sign. After all, higher productivity is associated with higher compensation.

But here’s the puzzle: real wages haven’t kept up (figure 1). In fact, they’ve barely moved, breaking away from the steady growth path we saw in previous years. So even as workers contributed more to output, they’ve not necessarily seen that reflected in their paychecks, at least on average up to 2022.

So why haven’t wages risen with productivity?

This disconnect raises some important questions: were firms holding back on wage increases or has worker bargaining power weakened? Or are productivity gains concentrated in sectors that don’t employ many people? In North Macedonia, the answer seems to lie in how growth is distributed across the economy, at least in part¹.

Not a Lack of Productive Firms, But a Lack of Connection and Skills Mismatches

The paradox isn’t due to a shortage of productive firms. On the contrary, the wide dispersion in productivity suggests that some firms, mostly exporters and foreign-owned firms, are doing quite well and are thriving. The real issue is that their success doesn’t spill over to the rest of the economy.

High-productivity firms do exist, particularly in sectors like ICT, but they are not large and are often concentrated in certain areas. These firms tend to hire specialized talent, meaning their wage gains are not widely shared across the workforce. Meanwhile, much of the employment growth is happening in the lower-productivity segments of manufacturing (figure 2). Many of these firms have expanded post-pandemic, but their productivity gains have been modest. Sectors like textiles and basic manufacturing continue to absorb a large share of the workforce, offering limited opportunities for wage progression. Even in growing industries such as automotive assembly, the benefits of scale may not be translating into broad wage increases, likely due to limited technological upgrading.

Structural issues, such as skill mismatches and limited labor mobility, and, possibly, geographic concentration of high-productivity firms, are preventing workers from moving into better-paying jobs. This inefficient sorting keeps many workers trapped in low-productivity, low-wage positions, even as parts of the economy thrive.

What This Means for Policy

Addressing this paradox requires more than just boosting firm-level productivity. Policymakers must also:

• Strengthen labor market mobility and reduce skill mismatches;
• Support the upgrading of lower-productivity industries; and
• Encourage the diffusion of productivity and wage gains beyond a narrow set of firms and workers.

Without these steps, productivity growth will remain disconnected from wage growth, undermining both inclusive development and long-term economic resilience.

^{1. It is also likely that the slowdown of real wages can be partly due to the exceptional inflation in 2022.}