Like most academic disciplines, economics has become highly specialized. The purpose of this chapter is to interpret the productivity record of the 1990s in historical context, by drawing together evidence from several lines of research that tend to proceed separately from each other: the economic history literatures on the diffusion of new technologies and institutional change in the labor market; work in labor economics on real wages and wage inequality; and the evidence from growth economics on alternating surges and pauses in the pace of productivity change. Together, these perspectives point towards a linkage between the productivity surge that began during the mid-1990s and the high-pressure labor market conditions that prevailed during the same period.
The objective is not to develop a comprehensive historical interpretation of American technology and productivity, only to suggest that the labor market has been neglected in earlier accounts. I maintain that it deserves a central role in the story of the 1990s and, for that matter, the preceding century.
In virtually any reasonable model of the labor market, higher wages will lead to an increase in the marginal and average productivity of workers. The effect may operate through the choice of technique in production, through factor substitution within a given technique, or through compositional shifts towards more productive workers and higher-value activities; but the correlation should definitely be positive.