Discussion paper

DP2927 Wage Growth, Productivity Growth, and the Evolution of Employment

This Paper studies the impact of wage growth on the evolution of employment in an intertemporal general-equilibrium model with endogenous productivity growth. For real wage growth above laissez-faire levels, we obtain steady-state equilibria in which productivity
grows at the same rate as wages, the real interest rate is below the laissez-faire level, and so is the common growth rate of consumption, demand, and output. In these steady-state equilibria employment contracts at a constant rate equal to the difference between the growth rates of productivity and output. This contrasts with the view that equality of wage growth and productivity growth is a condition for constant employment.


Hellwig, M and A Irmen (2001), ‘DP2927 Wage Growth, Productivity Growth, and the Evolution of Employment‘, CEPR Discussion Paper No. 2927. CEPR Press, Paris & London. https://cepr.org/publications/dp2927