At a micro level, it is standard to assume that higher labor costs (which I am hereafter going to term "wages") lead an individual firm to invest more in capital or make other labor-saving changes, boosting productivity. But macro-level analysis generally assumes that the prime way to increase wages is with higher productivity -- the opposite direction of causality. Looking at the the period from 1980 or so to the present, productivity growth in the U.S. has been much lower than over the previous several decades -- see, for instance, Robert J. Gordon's masterful work "The Rise and Fall of American Growth". Over the same period, the decline of unions led to a fall in the bargaining power of labor., and, up until recently, for many parts of the country, minimum wages had remained stagnant. Question: is it possible that if wages had been "artificially" propped up through different policies, that productivity growth would have been higher -- as a micro level analysis would imply. How much of the productivity puzzle could the weakened position of labor account for?
Yes, of course, it can (and will) be argued that these changes would have increased unemployment. But I note that the analyses of changes in minimum wage laws certainly does not point unequivocally in that direction, although the point is hotly disputed. Also, to what extent would higher labor compensation, versus capital compensation, have potentially resulted in consumer stimulus to the economy, perhaps offsetting, at least to some extent, the impact of higher wages on depressing employment -- i.e., macro feedback to greater demand.
