How can faster productivity growth *not* raise middle class incomes?

Jared Bernstein worries that it won’t.  But how can it not?

Let’s say an entrepreneur introduces a new product, call it the iPhone.  At first the relatively wealthy are the main buyers and at first a lot of the gains accrue to the IP holders.  Over time, however, the IP rents erode, smart phones become more popular, even with stupid patent laws smart phone innovations trickle down into cheaper models, and so on.  The middle class ends up better off.

Of course not all productivity gains are innovations.

Let’s say Ford can suddenly make cars — a known product — more cheaply.  Even in a world with market power, this expands output and lowers car prices, thereby raising real wages.  You might think labor won’t “get its fair share,” but still it should raise real wages, and that’s ignoring the possibility that wages in the auto plant might be bid up a bit.

So when some economists argue that faster productivity won’t raise middle class incomes, which model do they have in mind?

Even if you think income is shifting from capital to labor, how does the productivity gain worsen this shift?  (That is, real wages still ought to go up.)  Inquiring minds wish to know.

I am, by the way, familiar with a variety of diagrams showing a disconnect between productivity and real wages.  I’ll be happier with those when a) I know they are using common deflators, and b) they take adequate account of the possibly dysfunctional productivity in our hard to measure sectors of health, education, and government consumption.

Addendum: Read Scott Winship.


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