Question

To what extent does higher wage growth lead to higher productivity growth? The consensus seems to be that the causal mechanism with regards to the link between productivity growth and pay growth is caused by productivity growth. However, is there any empirical literature to suggest that, to some extent, higher pay growth can lead to higher productivity growth.

Answer 1

The Microeconomic study of behavior tells us that a higher wage leads to an increase in consumption and leisure because they are normal goods. So based on that theory, productivity could be lower. In the real world a higher wage can lead workers being happier with what they are doing. It can also influence them to be more focused on their tasks. So I think that a higher wage increases productivity because workers aren't "angry" with their work and therefore put forth a greater effort on it.