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Permanent Scars:The Effects of Wages on Productivity

Author

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  • Claudia Fontanari

    (Roma Tre University)

  • Antonella Palumbo

    (Roma Tre University)

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.

Suggested Citation

  • Claudia Fontanari & Antonella Palumbo, 2022. "Permanent Scars:The Effects of Wages on Productivity," Working Papers Series inetwp187, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp187
    DOI: 10.36687/inetwp187
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    File URL: https://doi.org/10.36687/inetwp187
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    Cited by:

    1. Fontanari, Claudia, 2024. "The role of wages in triggering innovation and productivity: A dynamic exploration for European economies," Economic Modelling, Elsevier, vol. 130(C).
    2. Ariel Luis Wirkierman, 2023. "Distributive Profiles Associated with Domestic Versus International Specialization in Global Value Chains," Working Papers Series inetwp200, Institute for New Economic Thinking.
    3. Zamparelli, Luca, 2024. "On the positive relation between the wage share and labor productivity growth with endogenous size and direction of technical change," Economic Modelling, Elsevier, vol. 131(C).
    4. Jose Barrales-Ruiz & Gyeongho Kim & Ivan Mendieta-Munoz, 2025. "Time-varying endogenous productivity growth dynamics," Working Papers 2515, New School for Social Research, Department of Economics.
    5. Sascha Keil & Walter Paternesi Meloni, 2024. "Kaldorian cumulative causation in the Euro area: an empirical assessment of divergent export competitiveness," Chemnitz Economic Papers 063, Department of Economics, Chemnitz University of Technology.
    6. Santos, Diogo Oliveira & Britto, Gustavo & Ribeiro, Rafael S.M. & Cardoso, Debora Freire, 2023. "Do wages squeeze markups? Sectoral-level evidence for Brazil, 2000–2013," Structural Change and Economic Dynamics, Elsevier, vol. 66(C), pages 52-66.

    More about this item

    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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