Wednesday, June 10, 2015

Productivity Growth CAN Reduce Middle Class Incomes!

Tyler at Marginal Revolution asks the question "How can faster productivity growth NOT raise middle class incomes?"
Am I missing something? Is it a trick question? It seems like there is a simple principle-of-economics answer. Faster productivity growth could lower (real) middle class incomes if the following are all true:
1. Productivity growth only increases productivity for capital and not for labor. Hence, the direct impact of the growth will be to shift demand for capital to the right, and increase the price and quantity of capital.
2. Middle class households mostly earn income from selling labor (and not capital). This seems to hold up empirical given the very high concentration of wealth relative to income.
3. Middle class households' labor is a strong substitute for capital. In other words, the increased productivity of capital leads to a (large) shift in relative factor demand away from labor and towards capital.

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