Does Inequality Increase Productivity?

Abstract

Wage inequality was investigated using the Current Population Survey combined with data on industrial productivity from the Center for Economic Studies of the U.S. Census Bureau. The research objective was to estimate the net effect of wage inequality on productivity in U.S. manufacturing industries from 1979 to 1996. Using fixed-effects panel models that control for unobserved differences in productivity across these industries, the results do not support the skill-biased technological-change argument, which assumes that increasing wage inequality has enhanced productivity in recent decades. In contrast, results from the regression analyses in this study clearly indicate that wage inequality has not had a positive net effect on productivity. Interpretation of these results suggests that organizational restructuring associated with the New Economy has increased labor market inequality but is less associated with increasing efficiency than is commonly assumed.