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Chapter 21: Problem 11

An article in the Economist noted that "for 60 years, from 1770 to 1830 , growth in British wages, adjusted for inflation, was imperceptible because productivity growth was restricted to a few industries." Not until the late nineteenth century, when productivity "gains had spread across the whole economy," did a sustained increase in real wages begin. Why would you expect there to be a close relationship between productivity gains and increases in real wages?

Short Answer

Expert verified
Productivity gains can lead to increased real wages as firms gain more revenue and share it with their workers. However, for significant wage growth, productivity gains need to be widespread throughout the economy, not restricted to a few industries.

Step by step solution

01

Understand the Terms

Productivity gains refer to the improvements in the ability of workers to provide goods and services. It's typically measured as the ratio of outputs (goods and services) to inputs (hours of labor). Real wages, on the other hand, is the purchasing power of wages, that is wages adjusted for inflation. It's the wage rate divided by the price level.
02

Analyze the Relationship

When productivity in an economy increases, it means that the inputs are able to generate more outputs. If we keep the price of goods and services constant, this would lead to an increase in the real revenue of firms. If workers contribute significantly to the productivity gains, it would be fair for firms to share the gains with them in the form of increased wages. Therefore, productivity gains could lead to an increase in real wages.
03

Contextualize the Historical Perspective

In the British scenario from 1770 to 1830, productivity gains were restricted to a few industries, which implies that only a few firms or sectors had the capability to increase wages. That's why the growth in real wages was imperceptible. However, when productivity gains spread across the economy in the late nineteenth century, it provided a wider base of firms the ability to increase wages and thus led to a sustained increase in real wages.

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