Permanent Scars: The Effects of Wages on Productivity

49 Pages Posted: 7 Sep 2022

See all articles by Claudia Fontanari

Claudia Fontanari

Roma Tre University

Antonella Palumbo

Universita di Roma Tre, Italy

Date Written: July 1, 2022

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.

Keywords: Labor Productivity, Wages, Shift-Share Analysis, Paolo Sylos-Labini, Classical-Keynesian approach

JEL Classification: E24; O47; L16

Suggested Citation

Fontanari, Claudia and Palumbo, Antonella, Permanent Scars: The Effects of Wages on Productivity (July 1, 2022). Institute for New Economic Thinking Working Paper Series No. 187, Available at SSRN: https://ssrn.com/abstract=4209715

Claudia Fontanari (Contact Author)

Roma Tre University ( email )

Via Ostiense, 159
Rome, RM 00145
Italy

Antonella Palumbo

Universita di Roma Tre, Italy

via Ostiense, 139
Rome, 00154
Italy

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