The Pay-Productivity Gap: An Engineering Perspective

Abstract

The pay-productivity gap has been and continues to be a subject of much debate in the literature as well as in the popular press, raising a number of questions. For example, why have wages not kept pace with recent increases in productivity in Western industrialized democracies? Is this a new phenomenon, or are there precedents? In this paper, we examine these and other related questions. We show that the pay-productivity gap is as old as economics itself, having a history dating back to the early 19th century ( Allen, 2007 ). Further, we argue that the “gap” itself can ultimately be attributed to 1) an erroneous understanding of the role of labor in modern material processes (production functions) and 2) a mis-specified formal model of such processes. More specifically, with the introduction of the steam engine, labor went from a source of energy/force/work to what was essentially a supervisory input overseeing machinery, resulting in a decoupling of the labor input from physical productivity. Subsequent increases in machine productivity were as such totally unrelated to labor, yet measured output per unit of labor increased. Firms had no reason to increase wages on the legitimate grounds that the supervisory input which labor had become was not responsible for the increase. Recent developments in automation and control technology have reduced the demand for labor without affecting output thus increasing measured output per unit of labor.