Permanent Scars: The Effects of Wages on Productivity

Abstract

This paper explores how stagnating real wages may have contributed to the slowdown of US productivity. Through shift-share analysis, we find that after a sharp change in distribution against wages, some historically high-productivity sectors (like manufacturing) switched towards slower productivity growth. This supports our hypothesis that the anemic growth of productivity may be partly due to the trend toward massive use of cheap labor. Our estimation of Sylos Labini’s productivity equation confirms the existence of two direct effects of wages, one acting through the incentive to mechanization and the other through the incentive to reorganize labor use. We also show that labor ‘weakness’ may exert a further negative effect on labor productivity. On the whole, we find that a persistent regime of low wages may determine very negative long-term consequences on the economy.

Towards Transformation of the Development Model in Latin America and the Caribbean: Production, Inclusion and Sustainability

“…The equation of Sylos Labini (1993) (see the note for figure 2) suggests that higher real wages can accelerate technical progress and reduce the cost of labour or promote organizational changes for that purpose. In addition, as consumption demand increases, wage increases can stimulate aggregate demand, increasing profit expectations, which fosters investment (Fontanari and Palumbo, 2022;Storm and Naastepad, 2012). The lower panel shows the effect of higher real wages stemming from institutional change that improves workers' bargaining power.…”

“…Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of G. Porcile and J. E. Alatorre, "New Directions in Latin American Structuralism", paper presented at the 26th Conference for the Forum for Macroeconomics and Macroeconomic Policies (FMM), Berlin, October 2022; D. G. Blanchflower and A. J. Oswald, "An introduction to the wage curve", Journal of Economic Perspectives, vol. 9, Nº 3, 1995; P. Sylos Labini, Progresso tecnico e sviluppo ciclico,Bari, Laterza, 1993;C. Fontanari and A. Palumbo, "Permanent scars: the effects of wages on productivity", Working Paper, Nº 187, Institute for New Economic Thinking (INET), July 2022; and S. Storm and C. W. M. Naastepad, Macroeconomics beyond the NAIRU, Cambridge, Harvard University Press, 2012.…”