Hi/ Lo productivity for Hi/ Lo wages

It’s a nation’s mix of sectors that largely determines its overall productivity and prosperity levels

And some sectors are much more productive than others

For example, the UK has some highly productive sectors such as manufacturing which are continually improving their (labour) productivity levels by investing in latest technology such as robotics, automation, IoTand AI

Japan is also a good example of this

The problem is, once these high-productivity sectors really get going, their labour rightly seek a share in the winnings they’ve helped produce via higher wages – however, there can come a point when wages become so high that management are forced to consider labour-substitute possibilities

Many then outplace labour, including skilled labour, whose only option usually is to move into less productive service sectors where the skills needed are less and there’s a plentiful supply of labour willing to work for much less pay

The result is most of the outplaced, relatively skilled labour that do find another job are often underemployed and/ or underpaid versus before – this breeds job dissatisfaction and lowers overall corporate morale – it also widens pay gaps, so increasing national feelings of inequality

Indeed, much of the productivity puzzle currently afflicting most developed nations is caused by this flow of labour from high to low productivity sectors – and mostly to low productivity service sectors, especially public sectors

It’s these service sectors that have not done the most with the productivity-improving technology now on offer to them, not least because much of the labour available to them is thought to be cheaper, at least in the short term

And this is despite all-time low interest rates and plenty of investment capital being available to them

It’s clear that lack of diffusion of the best to the rest, whether it’s use of latest technology or best practices, is the cause of much of the (apparent) labour productivity slowdown afflicting all developed nations

Baumol’s claim that some service sectors simply do not have the scope to improve productivity the way other sectors can is often trotted out to explain their poor performances – but this was more a convenient excuse than a plausible reason

The fact is that, whilst plentiful cheap labour continues to be available to many service sectors, wages there will be kept low putting a brake on overall consumer demand and ensuring that national productivity growth will remain tepid

Hence, productivity puzzles will continue to puzzle

It’s a vicious circle indeed!

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