Monday, 14 January 2013

Are high wages the driver for innovation

In What really powers innovation: high wages Tim Harford ponders the question "Why did the industrial revolution take off in the UK rather than in China?". His answer, the UK had higher wages and lower energy costs which acted as an economic incentive to increase automation. By contrast countries like India and China were the opposite.
According to Bob Allen’s calculations, had a French entrepreneur been presented with easy-assemble instructions for the spinning jenny in 1780, it would scarcely have been worth building it. In India, it would have been a definite loss-maker. But in the UK, the annual rate of return was almost 40 per cent. So much for the genius of British engineering: it wasn’t that nobody else could develop labour-saving machines, it was that nobody else needed them.
This is a persuasive explanation for the location of the industrial revolution, but it is also a solution to the puzzle with which this column began, because Bob Allen’s view of innovation points towards a self-reinforcing spiral. High wages lead to investment in labour-saving technology; that investment means that each worker will be operating more powerful equipment and producing more; this process in turn raises the productivity of labour and tends to raise wages. The incentive to innovate further only continues.
An interesting idea.

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