Link Between Low Wages and Low Productivity Growth: High Wages Make Low Productivity Jobs Disappear

05/27/2017 12:00am

Neil Irwin examined recent patterns in wage growth in an NYT Upshot piece. Irwin noted the extraordinarily low 0.6 percent pace of productivity growth in recent years (where are the robots?) and argued that wage growth has actually been relatively fast. He then examines why productivity growth might be so slow.

One explanation he left out is that low wages make it possible to hire workers at low productivity jobs. If an employer only has to pay a worker the $7.25 federal minimum wage, then it can be profitable to hire the worker at jobs that increase revenue for the employer by just over $7.25 an hour. This can mean hiring someone to work the midnight shift at a convenience store or to work as a greeter at Walmart.

If the employer had to instead pay a worker $10 or $12 an hour, then many very low productivity jobs would no longer exist. This would raise the average level of productivity in the economy by eliminating the least productive jobs.

In this way, it is possible that the weakness of the labor market has been a factor in reducing productivity growth as workers have had no choice but to take low paying, low productivity jobs. If this is true, as the labor market tightens and wages start to grow more rapidly, we should see productivity increase more rapidly.


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