Do Low Wages Cause Decreasing Productivity, or Is It the Other Way Around? Try Both.

Low wages may save companies money and boost profits over the short term, but their macro effects to the global economy can be devastating–. Economists have recently taken a closer look at the effects of low wages and they produce a nasty, downward cycle.

productivityAccording to The Economist, labor productivity in America fell 2.2% in the fourth quarter of 2015 alone. And growth has only registered at 0.6% for the year. The downturn in American productivity has cost about $2.7 trillion in lost output since 2004, or about $8,400 for every American. The Wall Street Journal points out another unhealthy trend – the widening divergence between productivity and wages, on top of a slowing progression of the two.

There are various theories as to the causes of low wages and productivity. Some economists say we’ve run out of big ideas. None of the recent technological advances have transformed economies like the inventions of the 19th and 20th centuries, such as electricity and the automobile. Others think inconsistent measurement may be the issue. Technological progress is tough to measure. And how should we measure the plummeting cost of digital media, subtracted from GDP? A third group of economists believe that rich economies are failing to shift people from unsuccessful companies and depressed locations to productive ones. Finally, the Economic Policy Institute blames stagnant wages on policy choices.

While many economists spend their time explaining the causes of low productivity and wages, others are investigating whether the two instigate each other. It makes sense: low wages lead to low morale and dampened incentive, encouraging poor productivity. Companies respond to poor productivity with mediocre wages, and so on. On the flip side, the majority of economists agree that productivity directly affects living standards. It seems increasingly likely that higher wages lead to a happier workforce and rising productivity.

So how do we get there? The Economist and The Wall Street Journal both support the pursuit of full employment. Full employment, typically considered a 5% unemployment rate or below, would give economies of all sizes, locations and types a boost in wages, productivity and, most importantly, a better quality of life for all.