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asked ago in Current Economic Issues by (170 points)
At a micro level, it is standard to assume that higher labor costs (which I am hereafter going to term "wages") lead an individual firm to invest more in capital or make other labor-saving changes, boosting productivity.  But macro-level analysis generally assumes that the prime way to increase wages is with higher productivity -- the opposite direction of causality.  Looking at the the period from 1980 or so to the present, productivity growth in the U.S. has been much lower than over the previous several decades  -- see, for instance, Robert J. Gordon's masterful work "The Rise and Fall of American Growth".  Over the same period, the decline of unions led to a fall in the bargaining power of labor., and, up until recently, for many parts of the country, minimum wages had remained stagnant.  Question:  is it possible that if wages had been "artificially" propped up through different policies, that productivity growth would have been higher -- as a micro level analysis would imply.  How much of the productivity puzzle could the weakened position of labor account for?

Yes, of course, it can (and will) be argued that these changes would have increased unemployment.  But I note that the analyses of changes in minimum wage laws certainly does not point unequivocally in that direction, although the point is hotly disputed.  Also, to what extent would higher labor compensation, versus capital compensation, have potentially resulted in consumer stimulus to the economy, perhaps offsetting, at least to some extent, the impact of higher wages on depressing employment -- i.e., macro feedback to greater demand.

1 Answer

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answered ago by (1.7k points)
In my opinion it works like a cycle. We can't doubt that higher wages lead to capital investments and this is the engine of development. A good example is Britain in the times of the Industrial Revolution, where the excess of coil and high wages led to a fast first industrialization.

An increase in productivity has to lead to a increase in wages because as output increases you need a higher demand to consume this output. Unemployment can arise faster if wages stay low because there is a greater output and no demand for this output leading to dismissals.

This wage growth lead to a higher investment on capital and productivity increases. This is the engine of prosperity and low wages not according to productivity level lead to a lower growth and prosperity.

I'll upload as soon as possible a little work I did years ago concerning wages level and productivity. It could be used in the future to lead a wage level related to productivity in a fair position.

I'm sorry if my English is not perfect.