Wren-Lewis, S. (2014) “Real wages, monetary policy and innovation“, Mainly Macro Blog, 22 June.
In my drive into Oxford I pass a petrol station that offers a car wash service. Ten or twenty years ago you would have expected this to involve a large degree of automation. However in this particular case it involves a few workers with hoses, mops and buckets. Now anyone who has seen my own car will realise that I know very little about car cleaning technology. But with this caveat, it seems to me this garage offers a nice illustration of how labour productivity is a function of relative prices. If labour becomes expensive relative to capital, it is worth the garage investing in a car washing machine, but if the opposite happens, once the machine reaches the end of its life it goes back to the old labour based technology.
In technical terms what I describe above is just an example of factor substitution. This is one explanation of the UK’s productivity puzzle, investigated at the aggregate level by Joao Paulo Pessoa and John Van Reenen. They “argue that ‘capital shallowing’ (i.e. the fall in the capital-labour ratio) could be the main reason for [the productivity puzzle]”. Although initially the US did not see productivity fall, there are indications a milder form of this may be happening there too.
Relevant posts:
- Onaran, O. & Stockhammer, E. (2014) “Raising wages should be a key component of economic growth strategies across the world“, LSE EUROPP, 07 May.
- European Commission (2014) “Government wages and labour market outcomes”, European Economy. Occasional Papers, April 2014: Brussels.
- Mabbett, D. & Schelkle, W. (2014) “The lack of monetary sovereignty is not the reason Eurozone countries struggled during the crisis“, LSE EUROPP, 04 April.