Final answer:
The net effect of increases in workers' wages and productivity depends on their relative rates of change. Economists analyze this by comparing wage increase rates to productivity growth rates and looking at economic indicators. The alignment of wages with productivity is a long-term outcome that reflects the value of output per worker.
Step-by-step explanation:
The net effect of increases in both workers' wages and workers' productivity depends on the balance between the two. An increase in productivity can lead to higher wages if firms perceive that the value of output per worker has grown. Hence, the key long-term determinant of wages is worker productivity. However, aligning wages with productivity is not immediate or smooth due to infrequent wage reviews and challenges in measuring productivity, especially for certain types of jobs.
To analyze which effect dominates, economists look at the productivity growth rates and compare them with wage increase rates. If productivity increases faster than wages, it may indicate that productivity improvements are not fully passing through to workers' earnings, potentially leading to increased profits for employers. Conversely, if wages rise faster than productivity, it could indicate short-term wage pressures that may eventually align with productivity rates or could lead to a loss for employers.
Understanding Economic Indicators
To determine which of the two effects—wage increases or productivity growth—dominates, one can examine a range of economic indicators including labor market trends, inflation rates, and overall economic growth. These indicators can signal changes in the natural rate of unemployment and the health of the economy as a whole. In theory, over the long term, wage levels should reflect productivity levels, as firms adjust wages based on the output of their workers.