Where does productivity growth come from? The definitive answer to that question would quickly win someone a Nobel prize and the immediate gratitude of economists and policymakers. (Well, maybe not the economists researching the causes of productivity growth.) The arrival of that revelation, however, is far from imminent.
But in the here and now, given the slow productivity growth in the United States, there’s been quite a bit of thinking recently about how to push productivity growth up. One provocative idea that has captured some attention is that boosting wages will help increase the pace of productivity growth.
When we think about the relationship between productivity and wages, it’s usually in the sense that productivity determines wages. The arrow of causality points from higher productivity to higher wages. But it’s possible that the arrow can point in the other direction at the same time—higher wages might also increase productivity. That’s some of the thinking behind the efficiency wage argument, reviewed here by Justin Wolfers of the University of Michigan and Jan Zilinsky of the Peterson Institute of International Economics.
Expanding that intuition to the broader economy, Noah Smith wonders if direct policy intervention in the form of higher minimum wages may increase innovation and therefore productivity growth. And in a piece from two years ago, Ryan Avent of The Economist fleshes out a deeper argument: that in incentivizing work from low-wage workers, wages remain low and reduces the incentive to innovate. If these workers were able to live without earning wages from work, wages might rise and spark labor-saving innovation. Jared Bernstein of the Center on Budget and Policy Priorities floats the idea that during periods of full employment, when the labor market and the economy as a whole use labor and capital to their capacity, productivity can be boosted as companies innovate in response to higher wages.
These arguments are similar to the idea of directed technical change, first introduced in a 2001 working paper by economist Daron Acemoglu of the Massachusetts Institute of Technology. The idea is that the relative prices of the factors of production affect the kind of innovation and productivity growth in an economy. So an economy where wages are higher will have productivity growth biased toward using labor less and using capital more. Discussing the possibility of a global labor shortage, Duncan Weldon uses a directed technical change-type argument to point out that a decline in available labor won’t necessarily lead to an increase in labor’s bargaining power.
It’s worth reminding ourselves that our knowledge of how to spur productivity growth is limited, to say the least. But let’s also not limit the potential sources that we look into.