Tip of the hat to Ted Fertik for bringing Servaas Storm's unpacking of total-factor-productivity growth (TFP) to my attention. Storm shows that TFP can be regarded mechanically as a weighted sum of the growth rates of labor and capital productivity, roughly in a 3:1 ratio in that order. TFP, of course, is a measure of our ignorance. It nudges us to look inside firms, ie the supply side. This leads down the path to situated communities of skilled practice, ie Crawford's 'ecologies of attention.' But perhaps it is better to work directly with labor productivity, certainly if Storm is right. Some say that high wages incentivize firms to invest in labor-saving innovations thereby increasing labor productivity. This is certainly consistent with the standard microeconomics view of firm behavior in that they are expected to do whatever it takes to get a competitive advantage in the market. A straightforward implication of this hypothesis is that real wage growth ought to predict productivity growth. We'll see what the evidence has to say about this presently. But let us first note the policy implications of the theory.
Wage Growth Predicts Productivity Growth
Wage Growth Predicts Productivity Growth
Wage Growth Predicts Productivity Growth
Tip of the hat to Ted Fertik for bringing Servaas Storm's unpacking of total-factor-productivity growth (TFP) to my attention. Storm shows that TFP can be regarded mechanically as a weighted sum of the growth rates of labor and capital productivity, roughly in a 3:1 ratio in that order. TFP, of course, is a measure of our ignorance. It nudges us to look inside firms, ie the supply side. This leads down the path to situated communities of skilled practice, ie Crawford's 'ecologies of attention.' But perhaps it is better to work directly with labor productivity, certainly if Storm is right. Some say that high wages incentivize firms to invest in labor-saving innovations thereby increasing labor productivity. This is certainly consistent with the standard microeconomics view of firm behavior in that they are expected to do whatever it takes to get a competitive advantage in the market. A straightforward implication of this hypothesis is that real wage growth ought to predict productivity growth. We'll see what the evidence has to say about this presently. But let us first note the policy implications of the theory.